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INDIRECT ENCROACHMENT ON FEDERAL 

AUTHORITY BY THE TAXING 

POWERS OF THE STATES 



BY 



THOMAS REED POWELL 



[Reprinted from the Harvard Law Review, Volumes XXXI and XXXII] 



Copyright, 1918, 1919, 
By The Harvard Law Review Association 



NATIONAL TAX ASSOCIATION 

195 Broadway 
NEW YORK CITY 



HARVARD 

LAW REVIEW 

VOL. XXXI JANUARY, 1918 NO. 3 



INDIRECT ENCROACHMENT ON FEDERAL 

AUTHORITY BY THE TAXING POWERS 

OF THE STATES 

"|\ /TARSHALL'S familiar dictum that "the power to tax involves 
■*■**- the power to destroy" * has the vice, not uncommon among 
aphorisms, of being only partly true. It implies that where a state 
may tax at all, it may tax as it pleases. This would mean that 
those restrictions on the taxing power of the states which are in- 
cident to the federal system of government apply only to the sub- 
jects which may be selected for taxation and in no way concern 
the methods by which the amount of any tax is determined. This 
seems to be the opinion of Marshall, for, in denying the power of 
a state to include United States bonds among the kinds of prop- 
erty selected for taxation, he said: "If the right to impose the tax 
exists, it is a right which in its nature acknowledges no limits. It 
may be carried to. any extent within the jurisdiction of the state 
or corporation which imposes it, which the will of each state and 
corporation may prescribe." 2 

The questions which the great Chief Justice was discussing called 
for no such statements. His argument in McCulloch v. Mary- 

1 McCulloch v. Maryland, 4 Wheat. 316, 431 (1819). 

2 Weston v. City Council of Charleston, 2 Pet. 449, 466 (1829). See also Marshall's 
statement in Brown v. Maryland, 12 Wheat. 419, 439 (1827): "It is obvious that 
the same power which imposes a light duty can impose a very heavy one, one which 
amounts to a prohibition. Questions of power do not depend on the degree to which 
it may be exercised. If it may be exercfeed at all, it must be exercised at the will 
of those in whose hands it is placed." 



JAN 29 192-fl 






322 HARVARD LAW REVIEW 

land 3 and Weston v. City Council of Charleston 4 was in support of 
the proposition that a state could levy no tax whatever on an in- 
strumentality of the federal government, even though the parti- 
cular tax in issue might not appreciably interfere with that gov- 
ernment. He was seeking some general rule which would relieve 
the courts of the necessity of considering the precise economic 
effect of every tax that came before them. This he found in the 
doctrine that a state, if it cannot tax a federal instrumentality into 
impotence, cannot tax it at all. Marshall was designating sub- 
ject matters which he deemed entirely outside of state authority. 
He was not considering whether subject matters within the reach 
of the taxing power of a state could be subjected to whatever 
methods of assessment the state might choose to apply. His 
strong federalism, it would seem, would make him loth to assert 
by explicit decision that, if a state selects a proper subject for 
taxation, no method of assessment can make the tax an interfer- 
ence with the federal government or an encroachment on any of 
its powers. 

This implication, however, has frequently been drawn from his 
too terse pronouncement. Many decisions with respect to the 
taxing power of the states have proceeded on the theory that in- 
quiry need be directed only to the characteristics of the subject 
matter on which the tax is levied. If the subject is an instrumen- 
tality of the federal government, the state tax is invalid as an in- 
terference with the necessary effectiveness of that government. 
If the subject is not an instrumentality of the federal government, 
the tax cannot be held invalid as an interference with that govern- 
ment. If the subject matter is interstate commerce, the state tax 
is invalid as a regulation of such commerce. If the subject matter 
is not interstate commerce, the tax cannot be a regulation of such 
commerce. Such are the conclusions which find warrant in the 
language of many of the judges of the Supreme Court. But an 
examination of the decisions shows that the fine of demarcation 
between valid and invalid state taxes is not so clear and straight 
as this language implies. 

The so-called "subjects" of taxation with which the cases have 
had to deal have all been within the territorial jurisdiction of the 
state. They have been privileges granted by the state, or acts 

3 4 Wheat. 316 (1819). 4 2 Pet. 449 (1829). 

©CI.A561669 






INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 323 

done, business conducted or property located within the state. 
The immunity of the subject from state taxation has been urged, 
not because it was geographically outside the state's jurisdiction, 
but because it was legally withdrawn from that jurisdiction by 
the creation of the federal system of government. The act in ques- 
tion might be an act of interstate commerce. The property might 
be owned by the United States or consist of the bonds of the United 
States. It is on the ground that the subject on which the tax is 
imposed is an agency of the United States or is an agency of in- 
terstate commerce, that what is within the territorial jurisdiction 
of the state is held to be nevertheless outside of its legal juris- 
diction. 6 

In discussing questions of legal jurisdiction, the use of such 
spatial terms as "within" and "without" involves possible con- 
fusion. It might be better to say "subject to" and "immune 
from" the jurisdiction of the state. In this connection "jurisdic- 
tion" has the connotation of "legal power to deal with," rather 
than that of "area within which action may be taken." And 
"power" must be understood not to refer to power in general, to 
all kinds of power, but to indicate only the specific exercise of au- 
thority in question. The same act or business or property may be 
immune from one exercise of authority by the state, and subject to 
other exercises of state power. Thus a state may tax goods from 
other states still in the original package, 6 but may not forbid their 
sale. 7 Goods originating in other states become subjects of the 
taxing jurisdiction of the state into which they are brought, before 
they become subjects of its police jurisdiction. So a state may not 
tax bonds of the United States, but may punish their theft or de- 
termine disputes as to their ownership. The jurisdiction of the 
state over any given subject matter cannot be predicated generally. 

5 Cf. Marshall's statement in Brown v. Maryland, 12 Wheat. 419, 441 (1827): 
"The constitutional prohibition on the States to lay a duty on imports, a pro- 
hibition which a vast majority of them must feel an interest in preserving, may cer- 
tainly come in conflict with their acknowledged power to tax persons and property 
within their territory. The power, and the restriction on it, though quite distinguish- 
able when they do not approach each other, may yet, like the intervening colours 
between white and black, approach so nearly as to perplex the understanding, as 
colours perplex the vision in marking the distinction between them. Yet the dis- 
tinction exists, and must be marked as the cases arise." 

6 Brown v. Houston, 114 U. S. 622, 5 Sup. Ct. Rep. 1091 (1885). 

7 Leisy z>. Hardin, 135 U. S. 100, 10 Sup. Ct. Rep. 681 (1890). 



3 2 4 



HARVARD LAW REVIEW 



The question in each case is a specific one, limited to the particular 
exercise of state authority in issue. 

The determination of the question whether any act or business 
or privilege or property is a subject of interstate commerce or is an 
agency of the federal government depends of course on its relation 
to interstate commerce or to the federal government. This rela- 
tion may be direct or indirect, remote or immediate. The ques- 
tion is often one of degree. A somewhat arbitrary line has to be 
drawn. In drawing this line in respect to any mooted subject, 
economic considerations are always pertinent and frequently con- 
trolling. The doctrine of Chief Justice Marshall does not exclude 
economics from use as a test. His own arguments were frequently 
economic ones. 8 But his doctrine uses the economic test for the 
single purpose of determining whether the act or business or privi- 
lege or property on which the tax is levied is subject to or immune 
from the exercise of the state taxing power under consideration. 
If immunity exists, the immunity is complete. The tax is beyond 
state authority whether the amount imposed is a million dollars 
or a cent. If, however, the tax falls on an object within the power 
of the state, the power may be exercised to any extent that the 
state pleases. The power to tax at all involves the power to tax 
as the state wills. It is a power which "in its nature acknowledges 
no limits." 

In spite of Marshall's reiteration of this position, it must be 
borne in mind that his attention was fixed on its negative aspects. 
Quite probably he assumed that any tax which in fact interfered 
with the operations of the federal government or encroached on 
any of its powers must necessarily be one levied on a subject with- 

8 See, for example, his argument in Brown v. Maryland, 12 Wheat. 419, 439 (1827) 
to establish that a tax on importers selling at wholesale is a tax on imports: "There is 
no difference, in effect, between a power to prohibit the sale of an article, and a power 
to prohibit its introduction into the country. The one would be a necessary conse- 
quence of the other. No goods would be imported if none could be sold. No object 
of any description can be accomplished by laying a duty on importation, which may 
not be accomplished with equal certainty by laying a duty on the thing imported in 
the hands of the importer." And on page 440: "A duty on imports is a tax on the 
article, which is paid by the consumer. The great importing States would thus levy 
a tax on the non-importing States, which would not be less a tax because their interest 
would afford ample security against its ever being so heavy as to expel commerce 
from their ports. This would necessarily produce countervailing measures on the 
part of those States whose situation was less favorable to importation." 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 325 

drawn from the jurisdiction of the state, *'. e., that the effect of the 
tax determined the nature of the subject on which it was levied. 
It is not to be credited, for example, that Marshall, if confronted 
with a situation in which domestic commerce was economically 
integrated with interstate commerce, would have permitted a tax 
on the domestic commerce which imposed any serious burden on 
the interstate commerce. The cases presenting this problem did 
not arise till long after his day. The press of economic facts has 
forced Marshall's successors to abandon his theory that a state 
may levy any tribute it pleases on a subject not immune from its 
taxing power. Taxes on subjects within the power of the state 
have been held invalid as regulations of interstate commerce, 
for the reason that the measure adopted for determining their 
amount took toll from interstate commerce. 9 No. longer is the 
state taxing power an autocrat even in its own bailiwick. The 
absolute monarch has become a limited monarch. It has been 
subjected to the restraint of the maxim: Sic utere tuo ut alienam 
non laedas. 

This change of doctrine has thus far been confined to the field 
of interstate commerce. It has not yet been applied to state taxes 
on proper subjects which nevertheless tap the value contributed 
by federal securities. But logically the new principle is as relevant 
to economic burdens on the federal borrowing power as to those on 
interstate commerce. The recent increase in the volume of federal 
securities will compel a reconsideration of any doctrine that per- 
mits a state to affect their value indirectly to an extent that it is 
forbidden to do directly. A review of the origin and development 
and modification of the notion that the power to tax is one which 
"in its nature acknowledges no limits" is therefore of more than 
merely historical or speculative interest. 

It is readily apparent that a tax on a subject which is not an 
agency of interstate commerce or of the federal government may 
burden that commerce or that government more than other taxes 
levied directly on such an agency. A tax of one one-hundredth 
of one per cent on receipts from interstate commerce within the 
state may affect that commerce so slightly as to be inappreciable. 

9 Western Union Telegraph Co. v. Kansas, 216 U. S. i, 30 Sup. Ct. Rep. 190 (1910); 
Pullman Co. v. Kansas, 216 U. S. 56, Jo Sup. Ct. Rep. 232 (1910); Ludwig v. Western 
Union Telegraph Co., 216 U. S. 146, 30 Sup. Ct. Rep. 280 (1910). 



326 HARVARD LAW REVIEW 

A tax on the franchise to be a domestic corporation whose amount 
is determined by applying the rate of five per cent to the receipts 
from interstate commerce within the state may impose a serious 
burden on that commerce. Yet, under the doctrine that the court 
will regard only the subject taxed and will pay no attention to the 
amount of the tax or to the measure by which it is determined, the 
infinitesimal burden will be held invalid and the serious one sus- 
tained. Thus taxes on subjects not themselves interstate commerce 
or an agency of the federal government may in a practical sense be 
regulations of that commerce and interferences with the opera- 
tions of that government. Any purely formal division of subject 
matters of taxation into two mutually exclusive classes may sus- 
tain one tax and abate another though the two are identical in 
results. 

Such formal classification, however, has speculative advantages 
and doubtless some practical ones. It establishes fairly definite 
rules and thereby simplifies the task of deciding cases and makes 
somewhat more certain the law. 10 But these gains may be won at 
the cost of some of the results which the Constitution is deemed to 
intend. There are competing considerations here, as in most 
problems of constitutional interpretation. This explains and also 
excuses the inconsistencies and contradictions which appear in the 
judicial treatment of the problem under consideration. 

With the taxes which have been held to fall directly on inter- 
state commerce or on instrumentalities of the federal government 
we are only incidentally concerned. The doctrines of the Supreme 
Court have been consistent and involve only the difficulty of de- 
termining whether the particular subject matter on which each 
tax is levied is or is not interstate commerce or an instrumentality 
of the federal government. These questions have provoked dif- 
ference of opinion among the members of the Supreme Court, but 

10 For eulogies on the merits of this method of marking the dividing line between 
state and federal powers, see Chief Justice Marshall in McCulloch v. Maryland, 
4 Wheat. 316, 429-30 (1819), and Mr. Justice Nelson in Bank of Commerce v. New 
York, 2 Black 620, 634 (1863). The Chief Justice says: "If we measure the power 
of taxation residing in the State by the extent of sovereignty which the people of a 
single State possess, and can confer on its government, we have an intelligible standard 
applicable to every case to which the power may be applied." And Mr. Justice Nelson 
observes that, when the limits between the powers and functions of the state and na- 
tional governments are ascertained and fixed in accordance with the principles an- 
nounced by Marshall, "all perplexity and confusion disappear." 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 327 

all have agreed that a state tax which was levied directly on inter- 
state commerce or on an instrumentality of the federal government 
was invalid however insignificant its effect. 

When, however, we turn to the cases where the subject of taxa- 
tion has admittedly been within the power of the state, we meet 
more fundamental differences of attitude. Some have thought 
that, if the subject taxed was within the zone of state authority, 
no tax thereon could be a regulation of matters beyond that zone. 
Others have held that the recognition that the subject was not 
immune from taxation did not compel the conclusion that the 
state might devise any method it pleased for determining the 
amount of the tax. It is the purpose of this article to review these 
diversities and to indicate as far as possible what considerations at 
present seem to be regarded by the Supreme Court as controlling. 



Interferences with Federal Instrumentalities 

The doctrine that a state cannot tax an instrumentality of the 
federal government is not based on any "express provision in the 
Constitution." It is said to rest "upon necessary implication" 
and to be "upheld by the great law of self-preservation; as any 
government, whose means employed in conducting its operations, 
if subject to the control of another and distinct government, can 
exist only at the mercy of that government." u The soundness of 
the principle must be universally conceded. The only room for 
difference of opinion lies in its application. 

An examination of the cases in which the doctrine has been 
applied shows that the Supreme Court has looked only to the 
subject matter on which the state tax fell. In Weston v. City 
Council of Charleston 12 the majority held that the tax in question 
was imposed directly on securities of the federal government — 
"on the contract subsisting between the government and the in- 
dividual" — and was therefore invalid. Mr. Justice Thompson, 
dissenting, insisted that the tax was on income. After quoting 
from the "Federalist," he observed that "it never entered into the 
discriminating mind of the writer referred to that merely investing 

n The Collector v. Day, 11 Wall. 113, 127 (1871). 
12 2 Pet. 449 (1829). 



328 HARVARD LAW REVIEW 

property, subject to taxation, in stock of the United States, would 
withdraw the property from taxation." 13 The property existed 
before its investment in stock by the national government. 

"In] the case now before us, the tax is not direct upon any means 
used by the government to carry on its operation. It is only a tax 
upon property acquired through one of the means employed by the 
government to carry on its operations, viz., the power of borrowing 
money upon the credit of the United States; and it is not perceived how 
any just distinction can be made in this respect, between bank stock 
and stock of the United States; both are acquired through the medium 
of means employed by the government in carrying on its operations; 
and both are held as private property; and it is immaterial to the pres- 
ent question in what manner it was acquired." 14 

In illustration of his point, the dissenting justice remarked that, 
though the states cannot tax the mint, they can tax the money 
coined at the mint, when held and owned by individuals. And 
he concluded by saying: 

"The unqualified proposition that a State cannot directly or indi- 
rectly tax any instrument or means employed by the general govern- 
ment in the execution of its power, cannot be literally sustained. Con- 
gress has power to raise armies, such armies are made up of officers and 
soldiers, and are instruments employed by the government in executing 
its powers; and although the army, as such, cannot be taxed, yet it will 
not be claimed that all such officers and soldiers are exempt from State 
taxation. Upon the whole, considering that the tax in question is a gen- 
eral tax upon the interest of money on loan, I cannot think it any vio- 
lation of the Constitution of the United States to include therein interest 
accruing from stock of the United States." 15 

But against this the majority opinion by Chief Justice Marshall 
declared that "the tax on government stock is thought by this 
court to be a tax on the contract, a tax on the power to borrow 
money on the credit of the United States, and consequently to be 
repugnant to the constitution." 16 Thus it is clear that the dispute 
related to the subject which the state had selected for taxation. 
Mr. Justice Johnson, who also wrote a dissenting opinion, conceded : 
"If I could bring myself to consider this question in the form in 

13 2 Pet. 449, 477-78 (1829). 14 2 Pet. 449, 479 (1829). 

15 2 Pet. 449, 480 (1829). 16 2 Pet. 449, 469 (1829). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 329 

which it is considered by the majority of the court, I should cer- 
tainly concur in the opinion that the tax was unconstitutional." 17 

It is rather difficult to regard the tax involved in the Weston 
Case as a tax on income. The ordinance under which it was levied 
reads as follows: 

". . . the following species of property, owned and possessed within 
the limits of the city of Charleston, shall be subject to taxation in the 
manner, and at the rate, and conformably to the provisions hereinafter 
specified; that is to say, all personal estate, consisting of bonds, notes, 
insurance stock, six and seven per cent stock of the United States, or 
other obligations upon which interest has been or will be received during 
the year, over and above the interest which has been paid (funded stock 
of this State, and stock of the incorporated banks of this State and the 
United States Bank excepted), twenty-five cents upon every hundred 
dollars." 18 

The most natural inference from this language is that the tax is 
on property from which income is received, with a deduction al- 
lowed to the taxpayer of an amount equivalent to that on which 
he may be paying interest. The decision stands for the proposition 
that the subject of taxation in question is not some abstract con- 
cept of property distinct from the specific kinds of property which 
the taxpayer may hold, but is that specific property. If that 
property is an obligation of the United States to pay money, it is 
an agency of the United States, since it is the concrete expression 
of the power to borrow. Any tax on such agency is wholly outside 
the power of the state. 

This doctrine with regard to property was later applied in Bank 
of Commerce v. New York City 19 to the capital of a corporation. 
The statute there provided that the capital stock of every cor- 
poration liable to taxation shall be assessed at its actual value. 
Mr. Justice Nelson, in refuting the contention that Weston v. City 
Council of Charleston 20 was not in point because in that case there 
was discrimination against the stock of the United States, laid 
down the doctrine that a "court may appropriately determine 
whether property taxed was or was not within the taxing power, 
but if within, not that the power has or has not been discreetly 
exercised." 21 Therefore, he says, the Weston Case necessarily 

17 2 Pet. 449, 472 (1829). 18 2 Pet. 449, 450 (1829). 

19 2 Black 620 (1862). 2 ° Note 4, supra. 21 2 Black 620, 631 (1862). 



330 HARVARD LAW REVIEW 

decided that the state could not tax federal securities at all, even 
though it taxed all other securities as well. 

After the Bank of Commerce decision, New York changed its 
statute, so as to read: "All banks, banking associations, etc., shall 
be liable to taxation on a valuation equal to the amount of their 
capital stock paid in, or secured to be paid in, and their surplus 
earnings, etc." 22 In Bank Tax Case 23 the Supreme Court held 
that this tax also was on the capital and therefore on the property 
in which the capital was invested, and that, in so far as this prop- 
erty consists of stocks of the United States, the case is indistin- 
guishable from the Bank of Commerce Case. Mr. Justice Nelson 
in the opinion for a unanimous court thus identified the capital 
of the corporation with the property in which it was invested : 

"Now, when the capital of the banks is required or authorized by 
the law to be invested in stocks, and, among others, in United States 
stock, under their charters or articles of association, and this capital 
thus invested is made the basis of taxation of the institutions, there 
is great difficulty in saying that it is not the stock thus constituting 
the corpus or body of the capital that is taxed. It is not easy to separate 
the property in which the capital is invested from the capital itself. It 
requires some refinement to separate the two thus intimately blended 
together. The capital is not an ideal, fictitious, arbitrary sum of money 
set down in the articles of association, but, in the theory and practical 
operation of the system, is composed of substantial property, and which 
gives value and solidity to the stock of the institution. It is the founda- 
tion of its credit in the business community. The Legislature well knew 
the peculiar system under which these institutions were incorporated, 
and the working of it; and, when providing for a tax on their capital at a 
valuation, they could not but have intended a tax upon the property in 
which the capital had been invested. We have seen that such is the prac- 
tical effect of the tax, and we think it would be doing injustice to the 
intelligence of the legislature to hold that such was not their intent in 
the enactment of the law." M 

The succeeding sentence of the opinion foreshadows the distinction 
which the court is soon to draw. The learned justice states that 
he has looked through all the statutes of New York relating to the 

22 Quoted in Bank Tax Case, 2 Wall. 200, 206 (1865). 

23 2 Wall. 200 (1865). 

24 2 Wall. 200, 208-09 (1865). For another statement to the same effect see 
note 169, infra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 331 

taxation of moneyed corporations from 1823 to the statute under 
review, and notes that "it will be seen in all of them that the tax 
is imposed on the property of the institutions, as contradistin- 
guished from a tax on their privileges or franchises." 25 

1. Taxes on Privileges 

Four years later the court decided three cases 26 in which the 
majority held that the tax was not on property but on the franchise 
to be a corporation, and that it was therefore valid in spite of the 
fact that it was measured in part by property invested in federal 
securities. Chief Justice Chase and Justices Miller and Grier dis- 
sented, being of the opinion that the tax was a tax on the property 
and not on the franchises and privileges of the corporation. 

Two of the cases were from Massachusetts. The Massachusetts 
court had declared that, if the taxes were on property, they were 
invalid under the state constitution. That court, however, sus- 
tained the taxes as on "commodities" under the somewhat peculiar 
interpretation put on that term contained in the Massachusetts 
constitution. The definition of "commodities" uniformly given 
by the Massachusetts court was that it signifies "convenience, 
privilege, profit and gains." 27 Mr. Justice Clifford for the major- 
ity of the Supreme Court ruled that the decisions of the state 
court "must be regarded as conclusive authorities that the tax in 
this case is a tax on the privileges and franchises of the corporation 
and not a tax on the property." 28 The minority evidently saw no 
ground on which to hold the taxes unconstitutional except the 
denial that the subject of taxation was a privilege. 

The two cases differed slightly from each other. Provident Sav- 
ings Institution v. Massachusetts 29 involved a requirement that all 
institutions for savings incorporated under the laws of the state 
shall pay "a tax on account of their depositors of three-fourths of 
one per cent per annum on the amount of their deposits." 30 

25 2 Wall. 200, 209 (1865). 

26 Society for Savings v. Coite, 6 Wall. 594 (1868); Provident Savings Institution 
v. Massachusetts, 6 Wall. 611 (1868); Hamilton Manufacturing Co. v. Massachu- 
setts, 6 Wall. 632 (1868). 

27 6 Wall. 632, 640 (1868). 

28 6 Wall. 611, 628 (1868). 

29 6 Wall. 611 (1868). 

30 6 Wall. 611, 620 (1868). 



332 HARVARD LAW REVIEW 

Hamilton Manufacturing Co. v. Massachusetts 31 had to do with a 
statute requiring certain classes of corporations to pay, in lieu of 
all other taxation, a tax of one and one-sixth per cent on the excess 
of the market value of their capital stock over the value of their 
real estate and machinery. The complaining corporation was 
denied exemption for the part of that excess value which was con- 
tributed by $300,000 of United States bonds owned by it. The 
Provident Savings Institution was denied any deduction from its 
$8,047,652.19 of deposits on account of $1,327,000 invested in the 
public funds of the United States. On the same day, in Society 
for Savings v. Coite, 32 the court declined to permit a Connecticut 
savings bank to deduct from a tax of one half of one per cent on 
its deposits of $4,758,273.37 the sum of $500,161 which "was then 
invested and held in securities of the United States, declared by 
act of Congress to be exempt from taxation." 33 

The Connecticut corporation had no capital stock, which seemed 
to be regarded by Mr. Justice Clifford as significant in establishing 
that the tax could not be one levied on property. In the Provi- 
dent Savings Case the learned justice makes the questionable as- 
sertion that "there is no necessary relation between the average 
amount of the deposits and the amount of property owned by the 
institution." 34 In that case also he said: "The amount of the tax 
does not depend on the amount of the property held by the institu- 
tion, but it depends upon the capacity of the institution to exercise 
the privileges conferred by the charter." 35 He seems to be as- 
suming that uninvested deposits of the bank are for some reason 
not property of the bank. Manifestly a corporation without 
capital stock may still have legal title to property, and a tax 
demanded from the corporation may be levied either on its prop- 
erty or on its franchise as the state chooses. The Massachusetts 
taxes were plainly intended to be levied on the franchises as "com- 
modities." But the Connecticut statute is substantially similar in 
wording to that held in Bank Tax Case 36 to be one imposing a 
tax on property. The New York statute involved in that case 
said that the banks "shall be liable to taxation on a valuation 
equal to" capital stock and surplus; the Connecticut statute said 



31 6 Wall. 632 (1868). 32 6 Wall. 594 (it 

33 6 Wall. 594, 604 (1868). " 6 Wall. 594, 631 (ii 

38 6 Wall. 594, 630 (1868). 36 Note 23, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 333 

that the banks shall pay to the state "a sum equal to" a certain 
percentage of their deposits. Neither statute specifically named 
the franchise as the subject of taxation. Nor does it seem that the 
decision of the Massachusetts court holding that the taxes imposed 
by its statute were not property taxes, as that term is used in the 
state constitution, is necessarily conclusive of the "subject" on 
which the tax is levied from the standpoint of its effect on instru- 
mentalities of the federal government. If the test of whether or 
not the tax is an interference with a federal instrumentality is the 
"subject" on which the tax is levied, the federal Supreme Court 
ought to determine independently any dispute as to what that 
subject is. Otherwise a state by mere use of words can decide for 
itself whether or not it is interfering with the federal government. 
Yet this very power on the part of the state is inherent in the doc- 
trine that, in determining whether a tax encroaches on federal 
authority, the court will look only to the subject taxed and will 
not regard the economic effect of the measure by which the amount 
of the tax is determined. 

Such, nevertheless, is the doctrine clearly implied by Chief 
Justice Marshall and specifically sanctioned by the actual deci- 
sions in the three cases under review. Corporate franchises, says 
Mr. Justice Clifford, are legal estates, and not mere naked powers 
granted to a corporation. They are "as much the legitimate 
subjects of taxation as any other property of the citizens within 
the sovereign power of the State." 37 

"All trades and avocations by which the citizens acquire a livelihood 
may also be taxed by the State for the support of the State government. 
Power to that effect resides in the State independent of the Federal gov- 
ernment, and is wholly unaffected by the fact that corporation or indi- 
vidual has or has not made investments in Federal securities. Unless 
such be the rule, the two systems of government, State and Federal, 
cannot both continue to exist, as the States will be left without any means 
of support or of discharging their public obligations." 38 

And with respect to the Connecticut statute he says: 

"Reference is evidently made to the total amount of deposits on the 
day named, not as the subject-matter for assessment, but as the basis 
for computing the tax required to be paid by the corporation defendants. 
They enjoy important privileges, and it is just that they should con- 

37 6 Wall. 594, 638 (1868). 38 6 Wall. 594, 638-39 (1S68). 



334 HARVARD LAW REVIEW 

tribute to the public burdens. . . . Existence of the power is beyond 
doubt, and it rests in the discretion of the legislature whether they will 
levy a fixed sum, or if not, to determine in what manner the amount shall 
be ascertained." 39 

These three decisions were the basis of Home Insurance Co. v. 
New York 40 which held that a tax on a corporate franchise, whose 
amount is determined by applying to the corporate stock the 
statutory rates for each one per cent of dividend declared, may 
include in this measure that part of the capital stock which is 
invested in United States bonds and the dividends thereon. Mr. 
Justice Field states the legal principle as follows: 

"The validity of the tax can in no way be dependent upon the mode 
which the State may deem fit to adopt in fixing the amount for any year 
which it will exact for the franchise. No constitutional objection lies in 
the way of a legislative body prescribing any mode of measurement to 
determine the amount it will charge for the privileges it bestows. It 
may well seek in this way to increase its revenue to the extent to which it 
has been cut off by exemption of other property from taxation. As its 
revenues to meet its expenses are lessened in one direction, it may look 
to any other property as sources of revenue, which is not exempted from 
taxation. Its action in this matter is not the subject of judicial inquiry 
in a federal tribunal." 41 

Here seems to be a definite statement that, if the state finds that 
the capital of the bank as property is exempt from taxation be- 
cause invested in federal securities, it may make good its loss 
from this source by taxing the franchise and basing the amount 
of the tax on the same capital held immune from the former 
tax. 42 And yet earlier in this very opinion it is declared: 

39 6 Wall. 594, 608 (1868). 

40 134 U. S. 594, 10 Sup. Ct. Rep. 593 (1889). 

41 134 U. S. 594, 600, 10 Sup. Ct. Rep. 593 (1889). 

42 This distinction between taxes directly on property and taxes on franchises 
measured by the value of property has been applied in determining whether federal 
taxes were interferences with the powers of the states. In Pollock v. Farmers' Loan 
& Trust Co., 157 U. S. 429, 15 Sup. Ct. Rep. 673 (1895), it was held that a general 
federal tax on incomes could not apply to incomes from state and municipal securities, 
because this would be an interference with the powers of the states. But in Flint v. 
Stone Tracy Co., 220 U. S. 107, 165, 166 (1911), the federal tax on corporations 
measured by their income was held valid as an excise tax, and in assessing the amount 
of the tax the court allowed the inclusion of income from state securities. The argu- 
ment to the contrary was said to confuse "the measure of the tax upon the privilege 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 335 

" Nor can this inhibition upon the States be evaded by any change in 
the mode or form of the taxation provided the same result is effected — 
that is, an impediment is thereby interposed to the exercise of a power 
of the United States. That which cannot be accomplished directly can- 
not be accomplished indirectly. Through all such attempts the court 
will look to the end sought to be reached, and if that would trench upon 
a power of the government, the law creating it will be set aside or its 
enforcement restrained." 43 

It is hardly surprising that such inconsistencies met with dissent. 
Very simply and without argument Mr. Justice Miller expresses 
his disagreement: 

"Mr. Justice Harlan and myself dissent from the judgment in this 
case, because we think that, notwithstanding the peculiar language of 
the Statute of New York, the tax in controversy is, in effect, a tax upon 
bonds of the United States held by the insurance company." u 

The doctrine of the absolute power of the state over taxation of 
corporate privileges was later applied to taxation of inheritances. 
In United States v. Perkins, 45 it was held, Mr. Justice Harlan alone 
dissenting, that a state may tax a bequest to the federal govern- 
ment, since the tax is not upon the property itself, but upon its 
transmission by will or descent. It is "in reality a limitation upon 
the power of a testator to bequeath his property to whom he 
pleases, a declaration that, in the exercise of that power, he shall 
contribute a certain percentage to the public use." 46 The statute 

with direct taxation of the state or of the thing taxed." After referring to the Home 
Insurance Case, Mr. Justice Day, speaking for a unanimous court, declared: 

"It is therefore well settled by the decisions of this court that when the sovereign 
authority has exercised the right to tax a legitimate subject of taxation as an exercise 
of a franchise or privilege, it is no objection that the measure of taxation is found in 
the income produced in part from property which of itself considered is non-taxable. 
Applying that doctrine to this case, the measure of taxation being the income of the 
corporation from all sources, as that is but the measure of a privilege tax within the 
lawful authority of Congress to impose, it is no valid objection that this measure 
includes, in part at least, property which, as such, could not be directly taxed. . . . 

"... There is no rule which permits a court to say that the measure of a tax 
for the privilege of doing business, where income from property is the basis, must be 
limited to that derived from property which may be strictly said to be actively used 
in the business." 

43 134 U. S. 594, 598, 10 Sup. Ct. Rep. 593 (1889). 

44 134 U. S. 594, 607, 10 Sup. Ct. Rep. 593 (1889). 
46 163 U. S. 625, 16 Sup. Ct. Rep.^1073 (1896). 

46 163 U. S. 625, 628, 16 Sup. Ct. Rep. 1073 (1896). 



336 HARVARD LAW REVIEW 

was said not to be an attempt to tax the property of the United 
States, "since the tax is imposed upon the legacy before it reaches 
the hands of the government." 47 This is a somewhat novel use 
of the doctrine that time may be of the essence. Here again the 
court looks at what was taxed, entirely disregarding where the 
burden fell. 48 

Ten years later it was held in Plummer v. Coler,* 9 Mr. Justice 
White alone dissenting, that a state inheritance tax may lawfully 
be imposed on the bequest to an individual of a life interest in 
United States bonds. The principle underlying this decision was 
thus stated by Mr. Justice Shiras: 

"We think the conclusion, fairly to be drawn from the State and Fed- 
eral cases, is, that the right to take property by will or descent is derived 
from and regulated by municipal law; that, in assessing a tax upon such 
right or privilege, the State may lawfully measure or fix the amount of the 
tax by referring to the value of the property passing; and that the inci- 
dental fact that such property is composed, in whole or in part, of Fed- 
eral securities, does not invalidate the tax or the law under which it is 
imposed." 50 

Counsel for the legatee in this case had urged upon the court the 
economic argument: 

"The States have no power to inpose any tax or other burden which 
would have the effect to prevent or hinde r the government of the United 
States from borrowing such amounts of money as it may require for its 
purposes, on terms as beneficial and favorable to itself, in all respects, 
as it could do if no such tax were imposed by the State." 51 

To this Mr. Justice Shiras answered that the recognition of the 
doctrine would require the overruling of earlier decisions. 

"For, if it were our duty to hold that taxation of inheritances, in the 
cases where United States bonds pass, is unlawful because it might in- 

47 163 U. S. 625, 630, 16 Sup. Ct. Rep. 1073 (1896). 

48 See United States v. Fox, 94 U. S. 315 (1877), holding that a state may forbid a 
devise of land to the United States. It is held also that a federal inheritance tax may- 
be applied to a legacy to a municipal corporation, Snyder v. Bettman, 190 U. S. 249, 
23 Sup. Ct. Rep. 803 (1903). But a federal income tax cannot be applied to income 
received by a city, United States v. Baltimore & Ohio Railroad Co., 17 Wall. 322 

(1873)- 

49 178 U. S. 115, 20 Sup. Ct. Rep. 829 (1900). 

60 178 U. S. 115, 134, 20 Sup. Ct. Rep. 829 (1900). 

61 178 U. S. 115, 119, 20 Sup. Ct. Rep. 829 (1900). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 337 

juriously affect the demand for such securities, it would equally be our 
duty to condemn all State laws which would deter those who form cor- 
porations from investing any portion of the corporate property in United 
States bonds." 62 

He went on further to argue that the effect of the inheritance tax 
in question on the federal borrowing power is less serious than that 
of the franchise taxes which have been sustained, since, on account 
of the low interest yield, only a few individuals invest in United 
States bonds. Mention is made also of the fact that "no incon- 
siderable portion of the United States loans is taken and held, as 
everyone knows, in foreign countries, where doubtless it is sub- 
jected to municipal taxation." 53 

"While we cannot take judicial notice of the comparative portions 
of the government securities held by individuals, by corporations, and 
by foreigners, we still may be permitted to perceive that the mischief to 
our national credit, so feelingly deplored in the briefs, caused by State 
taxation upon estates of decedents, would be inappreciable, and too re- 
mote and uncertain to justify us now in condemning the tax system of 
the State of New York." M 

Thus the economic argument is relied on to show that the legal 
doctrine of determining taxability or non-taxability according to 
the subjects on which the tax is levied does not cause the serious 
economic injury to federal authority that is contended. The facts 
adduced in support of the position are facts which change with 
time. The argument does not directly meet the contention of 
counsel 

". . . that individual persons will be driven to consider, when making 
their investments, whether they can rely on their legatees or heirs re- 
ceiving United States bonds unimpaired by state action in the form of 
taxation; and that if it should be held by this court that such taxation 
is lawful, capital would not be invested in United States bonds on terms 
as favorable as if we were to hold otherwise." 55 

Nor can the contention be dismissed by economic argument. Mr. 
Justice Shiras is entirely correct in saying that the same conten- 
tion would require the overruling of earlier decisions sustaining 
taxes on corporate franchises. He must therefore be understood 

52 178 U. S. 115, 136, 20 Sup. Ct. Rep. 829 (1900). 

53 Ibid. M Ibid. 55 Ibid. 



338 HARVARD LAW REVIEW 

as declaring that the mere fact that federal securities would be 
more advantageously disposed of, if they must always be excluded 
from every computation to determine the amount of a tax, does 
not make the tax in a legal sense a burden on a federal instru- 
mentality. 

The contention of counsel confuses two questions. One is whether 
the market for federal securities is less favorable after the state 
tax than before. The other is whether the market for federal secu- 
rities is more favorable if the tax takes toll from all other invest- 
ments but not from federal securities. There can be no doubt as 
to the economic answer to the second question. Plainly, if the tax 
is declared inapplicable in any form to federal securities, the rela- 
tive position of those securities in the market is improved. The 
result of imposing burdens on competing securities and leaving 
federal securities free is to confer a benefit upon the latter. This is 
what happens when non-discriminatory state taxes are held inap- 
plicable to federal securities. But whether the state tax on franchises 
or on inheritances, if measured indiscriminately by all investments, 
really hurts the federal borrowing power more than if no such taxes 
were levied at all is a more difficult question. It is a question which 
the abandonment in 1910 of the doctrine that a tax on a proper 
subject can never be an encroachment on federal authority 56 may 
force upon the consideration of the court. Mr. Justice Holmes, 
who opposed the abandonment of this doctrine, made the point 
that any effect on interstate commerce of a complete prohibition 
against economically related domestic commerce is really not a 
burden, but simply the denial of a collateral benefit. "If foreign 
commerce," he said, "does not pay its way by itself, I see no right 
to demand [for the foreign corporation] an entrance for domestic 
business to help it out." 57 So also it may be urged that, if federal 
instrumentalities are not actually impeded by a state tax, there 
should be no right to claim for them a collateral benefit from the 
operation of state laws. If the court abandons the test of "sub- 
jects" in cases where the tax falls on what has been held a proper 
subject, it may abandon it also where the tax falls on what has been 
held to be an improper subject. If it turns from somewhat arti- 
ficial legal distinctions to practical economic considerations, it may 

66 See cases cited in note 9, supra. 

67 216 U. S. 56, 76, 30 Sup. Ct. Rep. 232 (1909). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 339 

examine afresh the whole topic. This possibility will be discussed 
after the cases on interstate commerce have been dealt with. It 
is of course obvious that the frank substitution of the test of eco- 
nomic effect for that of the legal subject on which the tax is levied 
will not necessarily establish rules that will validate the kind of 
taxation previously held unconstitutional. 

2. Taxes on Property 

In the foregoing cases the essential basis of the decision is that 
the state was imposing the tax on a privilege which it might have 
withheld entirely and which therefore it may tax as it pleases. The 
subject taxed came into existence only by grace or favor of the 
state, and the state by taxing its own creature cannot be inter- 
fering with an instrumentality of the United States. The same 
reason would support state taxation of the full value of shares of 
corporate stock in domestic corporations with no deduction for 
such part of that value as may be represented by corporate in- 
vestment in federal securities. The decisions in favor of such taxa- 
tion, however, have been based on the somewhat broader ground 
that a tax on the share is not a tax on the property of the corpora- 
tion and therefore not on the federal securities in which some or 
all of that property may be invested. 

The point was first involved in Van Allen v. Assessors, 58 which 
held that the state could tax shares of stock in national banks 
though the capital of the banks was all invested in stocks and 
bonds of .the United States. This decision, however, was based on 
an interpretation of a congressional statute permitting the taxa- 
tion of the shares. The majority were of opinion that the statute 
meant that the state might tax the shares at their full value. The 
minority, on the other hand, thought that the only purpose of the 
statute was to preclude the inference that the shares must be en- 
tirely exempt from state taxation on account of the functions 
performed by the banks as instruments of the national government, 
and that it had no bearing on the question whether the value as- 
signed to the shares might include such as they derived from the 
federal securities in which the capital of the bank was invested. 
Chief Justice Chase, who, with Justices Wayne and Swayne dis- 

3fc - ■ ■ ■■ . — 

68 3 Wall. 573 (1866). 



340 HARVARD LAW REVIEW 

sen ted, referred to the decisions holding that a tax on the capital 
of a bank must not include such part of that capital as is invested 
in federal securities, 59 and declared that the same principle should 
be applied to a tax on the shares. If the contrary were admitted, 
he said: 

" It would follow that the legislature of New York by merely shifting its 
taxation from the capital to the shares, might have avoided the whole 
effect of the exemptions sanctioned by the decisions just cited. The same 
tax on the same identical property, without any exemption of national 
securities, might have been assessed and collected by adopting the simple 
expedient of assessment on the shares of capital, instead of on the aggre- 
gate of capital — on the parts instead of on the whole. . . . 

We 'do not understand the majority of the court as asserting that 
shares of capital invested in national securities could be taxed without 
authority from Congress. We certainly cannot yield our assent to any 
such proposition. To do so would, in our judgment, deprive the decisions 
just cited of all practical value and effect, and make the exemption from 
State taxation of national securities held by banks as investment of 
capital, wholly unreal and illusory." 60 

And to this he added: "It may well be questioned, in our judg- 
ment, whether Congress has power under the Constitution to au- 
thorize state taxation of national securities, either directly or 
indirectly." 61 Thus the dissenting judges clearly indicated their 
conviction that, though the shares might be a proper subject of 
taxation, the state could not, in assessing their value for this pur- 
pose, adopt a measure which would result in imposing on federal 
securities the same burden as a direct levy on those securities. This 
position, however, has not met with sanction in later decisions. 

In Cleveland Trust Co. v. Lander 62 the contention was made that 
a tax on the shares of stock in a bank chartered by the state "being 
equivalent to a tax on the property of the trust company, there 
must be deducted from the value of the shares that portion of the 

59 Bank of Commerce v. New York City, note 19, supra; Bank Tax Case, note 
23, supra. 

60 3 Wall. 573, 593 (1866). 

61 Ibid. 

62 184 U. S. in (1902). The reporter states that "Mr. Justice Harlan did not 
hear the argument, and took no part in the decision." There was no dissent in the 
case. Chief Justice Chase and Justices Wayne and Swayne who dissented in the 
Van Allen Case, note 58, supra, were no longer on the bench. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 341 

capital of the company invested in United States bonds." 63 The 
court answered that "the contention destroys the separate indi- 
viduality recognized, as we have seen, by this court, of the trust 
company and its shareholders." 64 There was a non-sequitur in 
basing this decision, as the court did, on the Van Allen Case, for 
the federal statute interpreted as sanctioning the taxation of 
shares in national banks at their full value has no necessary bear- 
ing on the taxation of shares in state banks. It was still open for 
the court to say that the question before it involved general prin- 
ciples inherent in the federal system of government. Without 
questioning the Van Allen Case it might have held that, though 
shares in state banks were proper subjects of state taxation, the 
state must exclude from their value such part as was contributed 
by the federal securities owned by the bank, since otherwise the 
state would by indirection impose on the federal borrowing power, 
burdens which had been held unconstitutional when imposed 
directly. But the court was regarding the subject on which the 
tax fell and not the elements of value in the measure by which its 
amount was determined. As pointed out earlier, the opinion made 
no mention of any power which the state had over these shares by 
reason of the fact that they were shares in a domestic corporation 
which the state might have declined to create. It seems clear that 
the court would have applied the same doctrine to an Ohio tax of 
shares in a corporation created by a sister state. 65 

The distinction set forth in the Van Allen Case and followed in 
Cleveland Trust Co. v. Lander was grudgingly recognized in Home 
Savings Bank v. Des Moines. 66 This case involved an Iowa statute 
which provided that shares of stock in state banks should be as- 
sessed to the banks and not to the individual stockholders. The 
majority held that the tax was imposed on the property of the bank 
and not on that of the stockholders, and that therefore the value 
of United States bonds owned by the bank must be deducted from 
the assessment. 67 It was conceded in the opinion that a contrary 

63 184 U. S. in, 114-15, 22 Sup. Ct. Rep. 394 (1902). 

64 184 U. S. in, 115 (1902). In Mead v. Commissioners, dealt with in the 
opinion in People ex rel. Duer v. Commissioners of Taxes, 4 Wall. 244 (1867) the 
same point had been decided. See p. 353, infra. 

65 See Sturges v. Carter, 114 U. S. 511, 5 Sup. Ct. Rep. 1014 (1885). 

66 205 U. S. 503, 27 Sup. Ct. Rep. 571 (1907). 

67 In reaching this interpretation reliance was placed on the difference between 



342 



HARVARD LAW REVIEW 



conclusion as to the subject on which the tax was levied would 
have required a contrary decision under the doctrine of the Van 
Allen Case. But Mr. Justice Moody gives the impression that he 
thinks the Van Allen Case was wrongly decided. Referring to that 
case he says: 

the method of taxing shares in state banks and that of taxing shares m national banks. 
With respect to the latter, the Iowa statute provided that they should be "assessed 
to the individual stockholders at the place where the bank is Located." Though the 
national banks, like the state banks, were liable for the payment of the taxes, the 
national banks were given a right of reimbursement from the stockholders, and were 
given a lien on the stock and unpaid dividends, with authority to sell the stock to 
satisfy the lien in case the dividends were not sufficient to furnish reimbursement for 
the tax. No such right of reimbursement was given to the state banks, and the court 
believed that they could not have " by any possibility a common-law right to recover 
the tax paid from the shareholders." Continuing, the opinion declared: "The law 
imposes no obligation on the shareholder. In paying the tax the corporation has 
paid its own debt, and not that of others, and there is nothing in such payment from 
which the law can imply a promise of reimbursement. These taxes, therefore, are 
not to be paid by the banks as agents of their stockholders, but as their own debt, 
and, unless it is supposed that the law requires them to pay taxes upon property 
which they do not own, the taxes must be regarded as taxes upon the property of the 
banks." 

In the brief' for the state it was insisted that the Supreme Court must accept as 
binding the interpretation put upon the state statute by the state court. This was 
the contention which Mr. Justice Clifford accepted in Hamilton Manufacturing Co. 
v. Massachusetts (see p. 331, supra). In the Des Moines Case Mr. Justice Moody does 
not directly meet the contention. After stating his conclusion that the tax is on the 
property of the banks, he says: "This we think is consistent with the interpretation 
of the law by the supreme court of Iowa, which sustained the tax on grounds which 
will presently be considered." Those grounds are that the tax is on the shares and 
not on the property of the bank. In the final paragraph of the opinion, the learned 
justice says: "We regret that we are constrained to differ with the supreme court 
of the state on a question relating to its law. But, holding the opinion that the law 
directly taxes national securities, our duty is clear." Thus plainly the Supreme Court 
rejects the interpretation of the state court as to the subject on which the tax was 
levied. 

Mr. Justice Moody makes it clear that the question of the subject on which the 
tax is imposed is not answered by ascertaining the person from whom payment is 
required. He expressly declares his approval of First National Bank v. Kentucky, 
9 Wall. 353 (1870), and the cases following it, which hold that a tax on the shares is 
not to be "deemed a tax on the capital of the bank, because the law requires the 
officers of the bank to pay this tax on the shares of its stockholders." These cases 
hold also that requirement of such payment from a national bank is not an inter- 
ference with the bank as an instrumentality of the national government. But all the 
cases with respect to state taxation affecting national banks are controlled by the 
congressional permission (15 Stat, at L. 34, chap. 7) that the real estate of the banks 
and the shares of their stockholders may be taxed by the states. See Talbott v. Silver 
Bow County Commissioners, 139 U. S. 438, n Sup. Ct. Rep. 594 (1891), and Owens- 
boro National Bank v. Owensboro, 173 U. S. 664, 19 Sup. Ct. Rep. 597 (1899). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 343 

"In an opinion in which. Justices Wayne and Swayne joined, Chief 
Justice Chase dissented from the judgment upon the ground that taxa- 
tion of the shareholders of a corporation in respect to their shares was an 
actual though an indirect tax on the property of the corporation itself. 
But the distinction between a tax upon shareholders and one on the 
corporate property, although established over dissent, has come to be 
inextricably mingled with all taxing systems, and cannot be disregarded 
without bringing them into confusion which would be little short of 
chaos." 68 

The Van Allen Case is accepted as having "settled the law that 
a tax upon the owners of shares of stock in corporations, in respect 
of that stock, is not a tax upon United States securities which the 
corporation owns." 69 The result of the various decisions is said 
to be that "although taxes by states have been permitted which 
might indirectly affect United States securities, they have never 
been permitted in any case except where the taxation has been 
levied upon property which is entirely distinct and independent 
from these securities." 70 The fact that a tax on the corporation 
"measured by the value of the shares in it" is "equivalent in its 
effect to a tax (clearly valid) upon the shareholders in respect of 
their shares " 71 is dismissed as immaterial. 

"But the two kinds of taxes are not equivalent in law, because the 
State has the power to levy one, and has not the power to levy the other. 
The question here is one of power, and not of economics. If the State 
has not the power to levy this tax, we will not inquire whether another 
tax, which it might lawfully impose would have the same ultimate 
incidence." 72 

The statement that the question is "one of power, and not of 
economics" invites analysis. Mr. Justice Moody makes it to 
dismiss the contention that the tax before him imposes no more 
serious burden on the borrowing power of the federal government 
than do other taxes held lawful. But at the same time he seems 
to imply that because of the economic effects it would have been 
wise not to permit those taxes on shares which have taken account 
of the value due to federal securities owned by the corporation. 

68 205 U. S. 503, 518, 27 Sup. Ct. Rep. 571 (1907). 

69 Ibid. 

70 205 U. S. 503, 519, 27 Sup. Ct. Rep. 571 (1907). 

71 Ibid. 

72 Note 71, supra. 



344 



HARVARD LAW REVIEW 



The final paragraph of his opinion might have been applied equally 
well to the cases involving taxation of shares. 

"If by the simple device of adopting the value of corporation shares 
as the measure of the taxation of the property of the corporation, that 
property loses the immunities which the supreme law gives to it, then 
national securities may easily be taxed whenever they are owned by a 
corporation, and the national credit has no defense against a serious 
wound." 73 

Yet Iowa by changing its statute and assessing these shares of 
stock to the stockholders might inflict this very wound. Mr. 
Justice Moody employs an economic argument to show that the 
tax on shares assessed to the corporation is as serious an inter- 
ference with the federal borrowing power as is a tax on the capital 
of the bank. Though he declines to use the economic argument 
to put the tax before the court in the class of those that have 
been held invalid, he relies on economic considerations to reinforce 
his conclusion that it properly belongs with those that have been 
held invalid. 

3. Taxes Discriminating against Federal Instrumentalities 

One further possibility of indirect encroachment on the federal 
borrowing power remains to be considered. It is settled that the 
franchises of domestic corporations and the shares in state and 
national banks are subject to taxation with no diminution in the 
assessment of -their value by reason of corporate investment in 
United States bonds. Suppose a state devises some plan whereby 
the franchises and the stock of corporations owning United States 
bonds are taxed more heavily than those of corporations having 
no such investments. Suppose it discriminates against such stock 
in favor of chattels or real estate. Would it not thereby put impedi- 
ments in the way of the federal borrowing power? There can be 
no doubt that a state ought not to be permitted to adopt methods 
of assessment which intentionally and systematically bear more 
heavily on franchises and stock of corporations owning federal 
securities than on other property. This would seem a necessary 
corollary from the cases holding that a state cannot discriminate 
against interstate commerce by selecting for taxation property or 

73 205 U. S. 503, 521, 27 Sup. Ct. Rep. 571 (1907). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 345 

sales of property of extra-state origin. 74 But it is of course not 
feasible to require a state to adopt a uniform method of assessing 
all the various kinds of property subject to taxation. May not 
the state, therefore, in exercising the discretion which must neces- 
sarily be allowed it, take heavier toll from values contributed by 
federal securities than from those derived from other sources? 

Some methods of accomplishing such results are clearly fore- 
closed by congressional legislation and the decisions thereunder. 
When Congress on February 25, 1863, passed the first act pro- 
viding for the organization of national banks, 75 it made no pro- 
vision for allowing state taxation of the shares. But the National 
Banking Act of 1864 76 permitted such taxation, subject to two 
restrictions: (1) that the rate should not be greater than that 
"assessed upon other moneyed capital in the hands of individual 
citizens of such state"; and (2) that "the tax so imposed under 
the laws of any state upon the shares of the associations shall not 
exceed the rate imposed upon the shares of any of the banks or- 
ganized under the authority of the state where such association is 
located." This second qualification was omitted from the reen- 
actment of the statute in 1868. 77 

Under these statutes it was held in Van Allen v. Assessors 7S 
that the state discriminated against shares in national banks by 
taxing them at their full value when no tax was imposed on shares 
in state banks. The fact that the capital of state banks was taxed 
was held insufficient to overcome this inequality, since, in asses- 
sing the value of the capital, the state was required to deduct such 
part as was invested in United States bonds. In People v. Weaver 79 
a New York statute, which permitted a debtor to deduct the 

74 Welton v. Missouri, 91 U. S. 275 (1875); Darnell & Son v. Memphis, 208 U. S. 
113, 28 Sup. Ct. Rep. 247 (1908). 

75 12 Stat, at L. 665. 

76 13 Stat, at L. hi. 

77 15 Stat, at L. 34; Rev. St. § 5219 (U. S. Comp. St., 1901, 3502). 

. 78 3 Wall. 573 (1866). This is the same case cited in note 58, supra. Of the 
point for which the case is here cited, the opinion said: "This is an unimportant 
question, as the defect may be readily remedied by the state legislature." For a differ- 
ent attitude towards the exemption of shares of stock where the capital of the corpora- 
tion is taxed, see note 158, infra. Almost the entire opinion in the Van Allen Case 
is devoted to the question whether, in assessing the shares of national banks, there 
must be deduction for the federal securities owned by the bank. 

79 100 y. s. 539 (1880). 



346 HARVARD LAW REVIEW 

amount of his debts from the assessment of other moneyed capital 
but not from shares of bank stock, was held void as to the shares 
of national banks. The decision cannot proceed on the ground 
that there was discrimination against national banks in favor of 
state banks, since no deduction for debts was allowed from any 
bank stock, state or national. The term "moneyed capital" is 
plainly taken in a broader sense than "capital invested in banks." 

"Nor can it be denied that, inasmuch as nearly all the banks in that 
State and in all others are national banks, that the owner of such shares 
who owes debts is subjected to a heavier tax on account of those shares 
than the owner of moneyed capital otherwise invested, who also is in 
debt, because the latter can diminish the amount of his tax by the amount 
of his indebtedness, while the former cannot. That this works a discrim- 
ination against the national bank shares as subjects of taxation, un- 
favorable to the owners of such shares, is also free from doubt. The 
question we are called to decide is, whether Congress in passing the Act 
which subjected these shares to taxation by the State, intended, by the 
very clause which was designed to prevent discrimination between 
national bank shares and other moneyed capital, to authorize such a re- 
sult." 80 

In interpreting the statute, it was held that the Act of Congress 
has reference to the entire process of assessment and includes the 
valuation of the shares as well as the ratio of percentage charged 
on such valuation. This doctrine was applied in Pelton v. Com- 
mercial Bank of Cleveland 81 to prevent the assessment of shares in 
national banks at their full value when there was intentional and 
systematic undervaluation of all other moneyed capital. That 
"moneyed capital" is assumed to include other capital than that 
invested in banks is clear from the reference to testimony in the 
case to the effect that the assessors "had assessed bank shares 
generally higher than other personal property, including, of course, 
other moneyed capital; and that they had assessed the shares of 
the national banks higher than private banks, and that it was 
their aim to do so." 82 Since there were the two kinds of discrimi- 
nation, the case might have been rested solely on the ground that 
the methods of assessment favored state banks at the expense of 

80 ioo U. S. 539, 543 (1880). 

81 ioi U. S. 143 (1880). To the same effect as Pelton v. Bank is Cummings v. 
Merchants' National Bank of Toledo, 101 U. S. 153 (1880), decided the same day. 

82 101 U. S. 143, 147 (1880). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 347 

national banks. But the reason given for the decision was the dis- 
crimination in favor of "other moneyed capital," and the inference 
is unmistakable that some personal property other than bank 
shares was regarded by the court as "moneyed capital." 

The statute involved in People v. Weaver 83 came before the 
court again in Supervisors of Albany County v. Stanley 84 and Hills 
v. National Albany Exchange Bank, 85 and it was held that the 
state must permit the deduction of debts from the assessment of 
shares of national banks, even though the other moneyed capital 
from which such deduction was allowed did not include other bank 
stock. 86 On the same day was decided Evansville National Bank v. 
Britton, 87 which arose under a statute of Indiana. Counsel for the 
county treasurer sought to distinguish the Indiana statute from 
that of New York on the ground that New York permitted deduc- 
tion of debts from all personal property except bank stock, while 
Indiana allowed the deduction only from "credits." But the 
court replied that, if one of the statutes "is more directly in con- 
flict with the Act of Congress than the other, it is the Indiana 
Statute." 88 

"The Act of Congress does not make the tax on personal property the 
measure of the tax on bank shares in the State, but the tax on moneyed 
capital in the hands of the individual citizens. Credits, money loaned 
at interest and demands against persons or corporations are more purely 
representative of moneyed capital than personal property, so far as they 
can be said to differ. Undoubtedly, there may be much personal prop- 
erty exempt from taxation without giving bank shares a right to similar 
exemption, because personal property is not necessarily moneyed capi- 
tal. But the rights, credits, demands and money at interest mentioned 
in the Indiana Statute, from which bond fide debts may be deducted, all 
mean moneyed capital invested in that way." 89 

83 Note 79, supra. 

84 105 U. S. 305 (1882). 

85 105 U. S. 319 (1882). 

86 These cases held also that the statute under which the tax on shares in national 
banks was levied was not itself unconstitutional. No relief was given to complainants 
who had no debts to deduct. And those who had debts to deduct were not granted 
an abatement of the whole of the tax on their shares in national banks, but only of 
that part of the assessment due to the state's disallowance of deduction for their debts. 

87 105 U. S. 322 (1882). 

88 105 U. S. 322, 323 (1882). 

89 105 U. S. 324 (1882). 



348 HARVARD LAW REVIEW 

Here is a definite statement that, though "other moneyed capital" 
may not include all personal property, it certainly includes other 
personal property than that invested in bank stocks. 

The same interpretation was adopted three years later in Boyer 
v. Boyer, 90 in which an injunction was sought to restrain the levy 
of a county tax on shares of stock in a national bank. By de- 
murrer to the bill it was confessed that a large amount of other 
kinds of property was exempt from county taxation. The state 
court had held that this was immaterial, since such exemptions 
did not include the shares of state banks and savings institutions. 
But Mr. Justice Harlan replied that this decision proceeded upon 
a misconstruction of the Act of Congress. He interpreted the 
statute as follows: 

"Capital invested in national bank shares was intended to be placed 
upon the same footing of substantial equality in respect of taxation by 
State authority, as the State establishes for other moneyed capital in 
the hands of individual citizens, however invested, whether in State bank 
shares or otherwise. As the Act of Congress does not fix a definite limit 
as to the percentage of value, beyond which the States may not tax na- 
tional bank shares, cases will arise in which it will be difficult to deter- 
mine whether the exemption of a particular part of moneyed capital in 
individual hands is so serious or material as to infringe the substantial rule 
of equality. But unless we have failed to comprehend the scope and effect 
of the taxing laws of Pennsylvania, the present case is not of that class." 91 

The demurrer was overruled and the defendants were put to their 
answer. Among the other securities exempt from county taxation 
were shares of stock in railroad corporations and bonds and stocks 
of certain other corporations which were subject to state but not 
to local taxation. The opinion plainly implied that the reasons 
of local policy for exempting these securities from local taxation 
were immaterial, saying that, if the principle of substantial equality 
between taxation of shares of national banks and taxation of other 
moneyed capital "operates to disturb the peculiar policy of some 
of the States in respect of revenue derived from taxation, the remedy 
therefor is with another department of the government, and does 
not belong to this court." 92 

90 113 U. S. 689, 5 Sup. Ct. Rep. 706 (1885). 

91 113 U. S. 689, 702, 5 Sup. Ct. Rep. 706 (1885). 

92 113 U. S. 689, 703 (1885). In reaching the decision that Congress meant to 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 349 

This decision seemed to open the door, in every case where 
shares in national banks were taxed, to a judicial inquiry whether 
the state, by exempting any other kind of moneyed capital, had 
imposed a substantial inequality of burden on the shares. Two 
years later, however, this door was practically closed by the re- 
stricted interpretation put upon "moneyed capital" in Mercantile 
National Bank v. New York. 93 Mr. Justice Matthews for an un- 
divided court 94 said that no attempt was made in B oyer v. Boyer 95 
to define the term or to enumerate the various kinds of property 
and investments that came within its description. After referring 
to earlier decisions 96 he declared: 

"It follows, as a deduction from these decisions, that 'moneyed capi- 
tal in the hands of individual citizens ' does not necessarily embrace shares 
of stock held by them in all corporations whose capital is employed, ac- 

forbid discrimination against shares of stock in national banks in favor of other 
property than shares of state banks, Mr. Justice Harlan calls attention to the act of 
1864, which provided that the rate of tax on shares of national banks should not 
exceed that imposed on shares of state banks, and adds (page 691): 

"But the Act of 1864 was so far modified by that of February 10, 1868, 15 Stat. atL. 
34, chap. 7, that the validity of such state taxation was thereafter to be determined 
by the inquiry, whether it was at a greater rate than was assessed upon other moneyed 
capital in the hands of individual citizens, and not necessarily by a comparison with 
the particular rate imposed upon shares in state banks. The effect, if not the object 
of the latter Act was to preclude the possibility of any such interpretation of the 
Act of Congress as would justify States, while imposing the same taxation upon 
national bank shares as upon shares in state banks, from discriminating against 
national bank shares, in favor of moneyed capital not invested in State bank stock. 
At any rate, the Acts of Congress do not now permit any such discrimination." 

The learned justice then quotes the prohibition against assessing shares in national 
banks at a greater rate than that assessed on other moneyed capital. The natural 
implication from the quotation given above is that the act of 1868 substituted a more 
comprehensive prohibition against discrimination than that contained in the act of 
1864. But the clause as to discrimination in favor of "other moneyed capital" was 
in the act of 1864 as well as in that of 1868. The latter act omitted the clause as to 
rates on shares of state banks. The only legitimate inference to draw from the differ- 
ence in the statutes is that the lawmakers thought that discrimination in favor of 
shares of state banks was amply provided for in the clause preventing discrimination 
in favor of other moneyed capital, and that therefore the specific clause in the earlier 
statute was superfluous. The change in the statute throws no additional light on 
what was meant by "other moneyed capital." 

93 121 U. S. 138, 7 Sup. Ct. Rep. 826 (1887). 

94 Mr. Justice Blatchford not sitting. 

95 Note 90, supra. 

96 People v. Commissioners, 4 Wall. 244 (1867); Lionberger v. Rouse, 9 Wall. 468 
(1870); Hepburn v. School Directors, 23 Wall. 480 (1875); Adams v. Nashville, 95 
U. S. 19 (1877). 



35© HARVARD LAW REVIEW 

cording to their respective corporate powers and privileges, in business, 
carried on for the pecuniary profit of shareholders, although shares in 
some corporations, according to the nature of their business, may be 
such moneyed capital." 97 

The true test, he says, "can only be found in the nature of the 
business in which the corporation is engaged." 98 And it is de- 
clared that by "other moneyed capital" Congress must have 
meant capital invested in some business that competes with the 
national banks. 

"The main purpose, therefore, of Congress, in fixing limits to State 
taxation on investments in the shares of national banks, was to render 
it impossible for the State, in levying such a tax, to create and foster an 
unequal and unfriendly competition, by favoring institutions or indi- 
viduals carrying on a similar business and operations and investments 
of a like character. The language of the Act of Congress is to be read 
in the light of this policy." " 

The learned justice refers to railroad, mining and manufacturing 
companies and makes the point that the property of such corpora- 
tions consists of real and personal property which, in the hands of 
individuals, no one would think of calling "moneyed capital." 
And from this he concludes: 

" So far as the policy of the government in reference to national banks 
is concerned, it is indifferent how the States may choose to tax such cor- 
porations as those just mentioned, or the interest of individuals in them, 
or whether they should be taxed at all. Whether property interests in 
railroads, in manufacturing enterprises, in mining investments, and 
others of that description, are taxed or exempt from taxation, in the 
contemplation of the law, would have no effect upon the success of 
national banks. There is no reason, therefore, to suppose that Congress 

97 121 U. S. 138, 153, 7 Sup. Ct. Rep. 826 (1887). 

98 121 U. S. 138, 154, 7 Sup. Ct. Rep. 826 (1887). 

99 121 U. S. 138, 155 (1887). A little later, the opinion says: "But 'moneyed 
capital ' does not mean all capital the value of which is expressed in terms of money. 
. . . Neither does it necessarily include all forms of investment in which the interest 
of the owner is expressed in money" (page 155). After describing the business of 
banking, Mr. Justice Matthews observes: "These are the operations in which the 
capital invested in national banks is employed, and it is the nature of that employ- 
ment which constitutes it in the eye of the statute 'moneyed capital.' Corporations 
and individuals carrying on these operations do come into competition with the busi- 
ness of national banks, and capital in the hands of individuals thus employed is what 
is intended to be described by the Act of Congress" (page 156). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 351 

intended, in respect to these matters, to interfere with the power and 
policy of the States." 10 ° 

It was held therefore that, however large may be "the amount of 
moneyed capital in the hands of individuals, in the shape of de- 
posits in savings banks as now organized, which the policy of the 
State exempts from taxation for its own purposes, that exemption 
cannot affect the rule for the taxation of shares in national 
banks. . . ." 101 

This restricted interpretation of "other moneyed capital" is 
directly at variance with that adopted in Boyer v. Boyer 102 and in 
the cases on the New York and Indiana statutes. 103 Though these 
latter cases are cited in the Mercantile Bank opinion for the propo- 
sition that the Act of Congress could not be evaded by unequal 
assessments on shares in national banks and other moneyed cap- 
ital, no notice is taken of the significant fact that the "other 
moneyed capital" with which comparison was made was exclusive 

100 121 U. S. 138, 156, 7 Sup. Ct. Rep. 826 (1887). 

101 121 U. S. 138, 161 (1887). Earlier in the opinion, pages 160-61, Mr. Justice 
Matthews said: "It cannot be denied that these deposits constitute moneyed capital in 
the hands of individuals within the terms of any definition which can be given to that 
phrase; but we are equally certain that they are not within the meaning of the Act 
of Congress in such a sense as to require that, if they are exempted from taxation, 
shares of stock in national banks must thereby also be exempted from taxation. No 
one can suppose for a moment that savings banks come into any possible competition 
with national banks of the United States." Then after quoting from Hepburn v. School 
Directors, note no, infra, to the effect" that "it could] not have been the intent 
of Congress to exempt bank shares from taxation because some moneyed capital 
was exempt," the learned justice added: "The only limitation, upon deliberate reflec- 
tion, we now think it necessary to add, is that these exemptions should be founded 
upon just reason, and not operate as an unfriendly discrimination against investments 
in national bank shares." This tempts one to ask: "When is other moneyed capital 
not other moneyed capital?" The answer seems to be: "When the discrimination 
in its favor is not unfriendly." The opinion seems to proceed along diverse and some- 
what inconsistent lines of reasoning. It seems to declare that all exemptions of capital 
that do not compete with national banks are immaterial, since such capital is not 
"other moneyed capital" within the meaning of Congress. Yet it is implied that 
exemptions of capital which is not "moneyed capital" as thus denned may violate 
the congressional statute if they are unfriendly to national banks and not founded 
upon just reason. Deposits in savings banks are said to be "moneyed capital in the 
hands of individuals within the terms of any definition which can be given to that 
phrase," and yet their exemption is immaterial because savings banks do not compete 
with national banks. For suggestions of a different ground on which to sustain the 
case and those following it, see pp. 366, 367, infra. 

102 Note 90, supra. 

103 Notes S3-87, supra. 



352 HARVARD LAW REVIEW 

of capital invested in institutions which compete with national 
banks. And though the Boyer Case did not, it is true, enumerate 
the various kinds of property that come within the description of 
"other moneyed capital," it held explicitly that the term embraced 
other property than shares of state banks and savings institutions. 
Nor is the decision in the Mercantile Bank Case in any way 
justified by the precedents cited for the proposition that "other 
moneyed capital" does not necessarily embrace stock in all 
corporations whose capital is employed in business for pecuniary 
profit. 

The first of these cases is People ex rel. Duer v. Commissioners 
of Taxes 101 decided the next term after Van Allen v. Assessors. 105 
In the Duer Case an owner of national bank stock complained of 
discrimination because he was allowed no deduction for the value 
of United States bonds owned by the bank, while individuals and 
corporations who were taxed on their property could deduct such 
federal securities as they owned. The complaint was rejected on 
the grounds (i) that the congressional statute applies only to the 
rate of assessment, and (2) that it has no reference to moneyed capi- 
tal in the hands of corporations but only to that in the hands of 
individual citizens. This first ground was overruled in People v. 
Weaver, 106 decided fourteen years later. The second ground was 
not applicable to the Mercantile Bank Case, because the exemptions 
there objected to included shares of stock and other capital in the 
hands of individuals. The Van Allen Case of course established 
that an owner of stock in a national bank must pay taxes on the 
value contributed by the federal securities owned by the bank, al- 
though an owner of the securities does not. No exemptions are 
allowed to owners of stock in corporations holding such bonds. 
The opinion in the Duer Case points out that Congress, when it 
permitted the taxation of shares in national banks but forbade 
discrimination against them, was well aware that federal securities 
were exempt from direct taxation. The argument of the complain- 
ant, says Mr. Justice Nelson, proves either that Congress meant 
that federal securities should be subject to taxation in the hands of 
their owners, or else that the deduction of such securities from 
taxes on property "should operate as a violation of the rate of 
the tax prescribed" in the statute permitting taxation of national 

104 4 Wall. 244 (1867). 105 Note 58, supra. m Note 79, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 353 

bank shares. "We dissent," he says, "from both conclusions." 107 
The point of the Duer Case is that exemption of federal securities 
from direct taxation does not make a tax on the full value of na- 
tional bank shares violate the requirement that such taxation 
shall not be "at a greater rate than is assessed on other moneyed 
capital." This is but to say that, if the banks as federal instru- 
mentalities are not embarrassed by taxation of the full value of 
their shares, the situation is not changed because another federal 
instrumentality — i. e., United States bonds — escapes direct 
taxation. It is not to say that Congress, because it meant to ex- 
clude United States bonds from the "other moneyed capital" which 
the State must tax at the same rate as shares in national banks, 
meant also to exclude shares in all corporations which did not 
compete with national banks. Moreover, though United States 
bonds escape direct taxation, they may be included in the measure 
adopted for assessing franchises and shares of corporations. This 
was declared in the opinion in the Duer Case in dealing with Mead 
v. Commissioners, 108 in which an owner of state bank stock was 
denied deduction for the value of federal securities owned by the 
bank. Had such deduction been granted to owners of stock in 
state banks and other corporations, and denied to owners of national 
bank stock, there would be a discrimination analogous to that held 
invalid in People v. Weaver. 109 

Another case cited in the Mercantile Bank opinion is Hepburn v. 
School Directors. 110 This held that it was not a discrimination 
against shares in national banks to assess them at their market 
value, although money at interest was assessed at its par value, 
since what is taxed in the case of the share is not money at interest, 
but the stockholder's interest in the money of the bank, which may 

107 4 Wall. 244, 257 (1867). 

108 4 Wall. 244, 258 (1867). No separate opinion was rendered in this case, or in ten 
other cases decided at the same time as the Duer Case and disposed of in the opinion 
in that case. The majority said that the general question involved in Mead v. Com- 
missioners "was distinctly presented in the bank cases of the last term of which Van 
Allen v. Assessors was one of the class, and disposed of." This neglects the fact that 
the opinion in the Van Allen Case went on the ground that Congress granted to the 
states express permission, not only to tax the shares of national banks, but to assess 
them at their fuU value, including that contributed by federal securities owned by 
the bank. See p. 339, supra. 

109 Note 79, supra. 

110 23 Wall. 480 (1875). 



354 



HARVARD LAW REVIEW 



be greater or less than the sums put in by the stockholders. The 
Hepburn case held also that exemption of mortgages, moneys 
owing on agreements for the sale of real estate, etc., from local 
taxation did not operate to discriminate against shares in national 
banks, since such exemption was partial only and was "evidently in- 
tended to prevent a double burden by the taxation both of prop- 
erty and the debts secured upon it." m The economic value be- 
hind those debts was taxed, and to tax both the debts and the 
property on which they were secured would impose double the bur- 
den that is placed on the shares of national banks or the elements 
of value behind them. The Hepburn opinion, it is true, observed 
that "it could not have been the intention of Congress to exempt 
bank shares from taxation, because some moneyed capital was 
exempt." m But this is only to say that some exemptions do not 
prevent the "substantial equality" required by the statute. The 
statement quoted above must be taken in connection with the re- 
mark in an earlier part of the opinion to the effect that "money at 
interest" is not the only moneyed capital included in the term as 
used by Congress. "The words are 'other moneyed capital.' That 
certainly makes s,tock in these banks moneyed capital, and would 
seem to indicate that other investments in stock and securities 
might be included in that descriptive term." 113 

Lionberger v. Rouse, 114 which is also cited in the Mercantile Bank 
opinion, arose under the provision in the Act of 1864 that the rate 
on shares of national banks should not exceed that imposed on 
shares of state banks. There were two state banks in Missouri 
which, by contract contained in their charter, could be taxed only 
one per cent on their capital stock. This was less than the rate 
imposed on shares of national banks. The Supreme Court recog- 
nized that the discrimination came within the letter of the con- 
gressional prohibition, but insisted that it was not within its spirit, 
because Congress could not have intended "such an absurd thing 
as that the power of the State to tax should depend on its doing an 
act which it had bound itself not to do." 115 Reference was also 
made to the fact that these two banks "hold a very inconsiderable 
portion of the banking capital of the State, and that the shares of 



m 23 Wall. 480, 48s (1875)- m Ibid. 

"a 23 Wall. 480, 484 (1875). ui 9 Wall. 468 (1870). 

116 9 Wall. 468, 475 (1870). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 355 

all other associations in the State (there being many), with all the 
privileges of banking except the power to emit bills, are taxed like 
the shares in national banks." 116 The case evidently depends on 
its own special facts. The court declares also that the provision 
in the Act of 1864 under which the case arose refers only to banks of 
issue and not to banks of deposit. Since this portion of the statute 
was soon repealed, and since the continuing provision as to "other 
moneyed capital" is held to include shares of stock in other state 
banks than banks of issue, this point in the decision, whether 
sound or questionable, is unimportant. The opinion in the Mercan- 
tile Bank Case is therefore unwarranted in relying on the quotation 
from the Lionberger Case to the effect that "there was nothing to 
fear from banks of discount and deposit merely, for in no event 
could they work any displacement of national bank circulation." 117 
The other case cited in the Mercantile Bank opinion is Adams v. 
Nashville, 118 from which the following quotation is made: 

"The Act of Congress was not intended to curtail the State power 
on the subject of taxation. It simply required that capital invested in 
national banks should not be taxed at a greater rate than like property 
similarly invested. It was not intended to cut off the power to exempt 
particular kinds of property, if the Legislature chose to do so. Home- 
steads to a specified value, a certain amount of household furniture (the 
six plates, six knives and forks; six teacups and saucers of the old stat- 
utes), the property of clergymen to some extent, school houses, academies 
and libraries are generally exempt from taxation. The discretionary 
power of the Legislatures of the States over all these subjects remains as 
it was before the Act of Congress of June, 1864. The plain intention of 
that statute was to protect the corporations formed under its authority 
from unfriendly discrimination by the States in the exercise of their 
taxing power." 119 

But this statement was not at all necessary to the decision in the 
Adams Case. The two objections there made were to the exemp- 
tion of capital in state banks and of bonds of municipal corpora- 
tions. As to the former the court said that the exemption of the 
capital stock was immaterial since the shares of stock were taxed 
to their owners. And as to the latter, it was said that it did not 

116 9 Wall. 468, 474 (1870). 

117 Ibid. Quoted in 121 U. S. 138, 150 (1887). 
™ 95 U. S. 19 (1877). 

m 95 U. S. 19, 22 (1877). Quoted in 121 U. S. 138, 151 (i887). 



356 HARVARD LAW REVIEW 

appear that the municipal bonds were in fact exempt. There was 
therefore no occasion for Mr. Justice Hunt to say in the opinion in 
the Adams Case that the Act of Congress was not intended to cur- 
tail the state power on the subject of taxation. Of course the Act 
did not mean to prevent a state from doing as it pleased with regard 
to subjects over which it has complete control. But plainly it 
meant to qualify the permission to tax shares of national banks, 
by the requirement that they should not be assessed at a greater 
rate than other moneyed capital. Therefore the action of the 
state with respect to matters within its control was made the test 
of the propriety of action with respect to matters without its con- 
trol, except to the extent permitted by Congress. The general 
statement quoted from the Adams opinion is opposed to the state- 
ments in the Boyer opinion eight years later. The Mercantile 
Bank Case, in declaring that "other moneyed capital" meant only 
capital which competes with national banks, made new law. 

The decisions of the Supreme Court following the Mercantile 
Bank Case have not uniformly rested on the ground of this re- 
stricted interpretation of moneyed capital. In Whitbeck v. Mer- 
cantile National Bank, 120 where all bank stocks were assessed at 
sixty-five per cent of their full value and other property at sixty 
per cent, the Supreme Court said that "the discrimination against 
national banks, as compared with other moneyed capital is estab- 
lished," and sustained an injunction against collecting the full 
amount of the tax on the shares of national banks. 121 The court 
also held that the bank was entitled to relief in respect to the tax 
on certain stock whose owners had not been allowed to deduct their 
indebtedness from the assessment. The objection that the demand 
for the deduction was not seasonably made is dismissed on the 
ground that "the laws of Ohio make no provision for the deduction 
of the bond fide indebtedness of any shareholder from the shares of 

120 127 U. S. 193, 8 Sup. Ct. Rep. 1121 (1888). 

121 Another ground for the decision is that it appeared that the State Board of 
Equalization had no power under the Ohio statute to equalize assessments of bank 
stocks with those of other property, but only to "diminish or increase the assessed 
value of the shares of stock by such a per centum as will make them equal among 
themselves." While this unwarranted action by the state board would be a sufficient 
ground for declaring invalid the tax on the shares in national banks, it would not 
necessarily involve a federal question. The opinion indicates that the decision would 
not have been different had the state statute authorized the action of the state 
board. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 357 

his stock, and provide no means by which said deduction can be 
secured." 122 This language clearly implies that no deduction of 
debts was allowed from the assessment of any bank stocks, state 
or national. But in First National Bank of Wellington v. Chap- 
man™ the Whitbeck Case was distinguished on the ground that 
the court had "assumed that under the statute of Ohio, owners of 
all moneyed capital other than shares of national banks were per- 
mitted to deduct" their indebtedness. 124 And the opinion in the 
Chapman Case declares explicitly that so long as shares in state and 
national banks are taxed alike, deduction of debts from assess- 
ment of "credits" that do not enter into competition with national 
banks is immaterial. 

Three years earlier, however, the opinion in First National Bank 
of Garnett v. Ayers 125 had failed to take the broad ground that 
stock in institutions that compete with national banks is all that 
is embraced within the term "moneyed capital." This case, too, 
involved a statute permitting deduction of debts from assessment 
of " credits " but not from assessment of any bank stock. The reason 
given for the decision was that it did not appear how extensive were 
the deductions allowed for debts in assessing other property. The 
court said that to come to a decision in favor of the plaintiff in 
error it would be necessary to take judicial notice of the fact claimed 
by counsel "that the amount of moneyed capital in the state of 



122 127 U. S. 193, 199, 8 Sup. Ct. Rep. 1121 (i£ 

123 173 U. S. 205, 19 Sup. Ct. Rep. 407 (1899). 

124 173 U. S. 205, 220 (1899). It is almost certain that no such assumption was made 
in the Whitbeck Case. The opinion in that case speaks of "shareholder" and "shares 
of stock" without any qualifying terms. Moreover, the other discriminations in the 
case were plainly between all bank stocks on the one hand and other property on the 
other. From section 2762 of the Revised Statutes of Ohio in force on January 1, 1886, 
it appears that shares of stock "in any incorporated bank or banking association . . . 
whether now or hereafter incorporated or organized under the laws of this state or of 
the United States" are treated alike. No deduction for debts seems to be allowed 
from any property subject to taxation except in the case of what is termed "credits." 
Provision for such deduction is made in section 2730 in which it is said that "the 
term 'credits' shall be held to mean the excess of the sum of all legal claims and de- 
mands . . . over and above the sum of legal bond fide debts owing by such person." 
It is worthy of note too that the complainant in the Whitbeck Case was excused for 
not having requested the deduction of his debts on the authority of Hills v. National 
Albany Exchange Bank, note 85, supra, in which there was no discrimination 
between national and state banks as to deduction of indebtedness from assessments 
of their shares. 

125 160 U. S. 660, 16 Sup. Ct. Rep. 412 (1896). 



358 HARVARD LAW REVIEW 

Kansas from which debts may be deducted, as compared with the 
moneyed capital invested in national banks, was so large and sub- 
stantial as to amount to an illegal discrimination against national 
bank shareholders." 126 This the court declined to do. It said that 
"the single fact that the statute of Kansas permits some debts to 
be deducted from some moneyed capital, but not from what is 
invested in the shares of national banks, is not sufficient. . . ." 127 
The "moneyed capital" which the court had in mind must 
have been other property than shares in state and national 
banks. 

So also, in the most recent case on the subject, the court does not 
base its decision on the ground that no property that does not 
compete with national banks is "moneyed capital." This is Amos- 
keag Savings Bank, 12 * in which a New Hampshire bank, owning 
stock in a New York national bank objected to the New York as- 
sessment of its shares because it was not allowed to deduct from 
the assessment an amount equal to its debts, which were in fact 
greater than the value of its stock. From all property except stock 
in state and national banks such deduction was allowed. The 
complainant relied on People v. Weaver. 129 Mr. Justice Pitney 
distinguished the case on the ground that the New York statute 
there involved taxed bank stock in the same manner as all other 
property, while the later New York statute involved in the Amos- 
keag Case had a different method of assessing bank stock from 
all other property. By that statute shares of stock in state and 
national banks were taxed at one per cent except in towns where 
the local rate was less. All other property was subject to varying 
local rates of assessment, which were usually higher than one per 
cent. The learned justice quotes at length from the opinion in the 
Mercantile Bank Case, but makes no further comment thereon 
than that "the rule of construction thus laid down has since been 
consistently adhered to by this court." 130 He fails to state 
that the Mercantile Bank Case overrules the Weaver Case to the 
extent of holding that no comparison may be made between the 
assessment of bank shares and of other property that does not 

126 160 U. S. 660, 667, 16 Sup. Ct. Rep. 412 (1896). 

127 160 U. S. 660, 667-68, 16 Sup. Ct. Rep. 412 (1896). 

128 231 U. S. 373, 34 Sup. Ct. Rep. 114 (1913). 

129 Note 79, supra. 

130 231 U. S. 373, 391, 34 Sup. Ct. Rep. 114 (1913). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 359 

compete with bank shares. The important part of the opinion is 
as follows: 

"Nor can we say that the taxing scheme contravenes the limits pre- 
scribed by Sec. 5219, Rev. Stat, merely because in individual cases it 
may result that an owner of shares of national bank stock, who is in- 
debted, may sustain a heavier tax than another, likewise indebted, who 
has invested his money otherwise." 131 

The vice in the contention to the contrary was said to be that it 
insists that "Sec. 5219 deals with the burden of the tax on the in- 
dividual shareholder, rather than upon shareholders as a class." 132 
The opinion points out that, since bank stocks are assessed at a 
lower rate than other property, the deduction of debts from such 
other property is not likely to make the assessment of that other 
property discriminate against bank stocks, and says that, if the 
contrary is true in general, the complainant must allege and prove 
it. 133 Thus it seems that the court thought that intentional and 
general discrimination against stocks of national banks and other 
banks in favor of property not competing with national banks 
would come within the limitations of the federal statute. Never- 
theless in this and the other cases on the subject the Mercantile 
Bank Case is quoted with approval. But at the same time a number 
of the opinions seem to treat the rule of the Mercantile Bank Case 
with respect to the definition of "other moneyed capital" as a rule 
nisi and not a rule absolute. 

But in dealing with exemptions of other property from taxation 

131 231 U. S. 373, 393, 34 Sup. Ct. Rep. 114 (1913). 

132 Ibid. 

133 "There are other considerations to be weighed in determining the actual burden 
of the tax, one of which is the mode of -valuing bank shares — by adopting 'book 
values' — which may be more or less favorable than the method adopted in valuing 
other kinds of personal property. As against the owner of bank shares who, by alleging 
discrimination, assumes the burden of proving it, and who fails to show that the 
method of valuation is unfavorable to him, it may be assumed to be advantageous." 
231 U. S. 373, 392-93 (1913). And in considering the contention of the complainant 
that the statement of the New York court that "when all things are considered, the 
rate, even without the privilege of deducting debts/ is not greater than that applied to 
other moneyed capital" is a mere surmise, Mr. Justice Pitney says: "We do not 
think it is to be so lightly treated; but, if it were, it still remains to be said that it 
was incumbent upon plaintiff in error to show affirmatively that the New York taxing 
system discriminates in fact against holders of shares in the national banks, before 
calling upon the courts to overthrow ife; and no such showing has been made" (page 
393)- 



360 HARVARD LAW REVIEW 

reliance has usually been placed on the restricted definition of 
"other moneyed capital." 134 In Bank of Redemption v. Boston, 135 
an alleged discrimination against shares in national banks in favor 
of shares in trust companies, insurance companies and in a tele- 
phone company was held immaterial, since "the interest of indi- 
viduals in these institutions is not moneyed capital" and "the in- 
vestments made by the institutions themselves, constituting their 
assets, are not moneyed capital in the hands of individual citizens 
of the State." 136 In First National Bank of Aberdeen v. County of 
Chehalis, 137 it was alleged in the bill that there was exempt in the 
county loans and securities due from residents to residents, to an 
amount in excess of $237,400, and in the state outside of the county 
over $14,000,000 of loans and securities due from residents to resi- 
dents, and at least $26,000,000 of stocks and bonds of insurance, 
wharf and gas companies, while the total capitalization of all 
national banks in the state was only $7,000,000. A demurrer to 
the bill was sustained for the reason that, under the prior decisions of 
the court, since the capital exempted did not come into competition 
with national banks, it is not within the meaning of "other moneyed 
capital" as that term was used by Congress. 138 But Justices Har- 
lan, Brown and White dissented, being of opinion that "the bill 
makes a prima facie case of illegal discrimination against capital 
invested in national bank stock." 139 The majority seemed to 

134 In addition to the cases here considered, see Newark Banking Co. v. Newark, 
121 U. S. 163, 7 Sup. Ct. Rep. 839 (1887) ; Palmer v. McMahon, 133 U. S. 660, 10 Sup. 
Ct. Rep. 324 (1890); and Talbott v. Silver Bow County Commissioners, 139 U. S. 
438, 11 Sup. Ct. Rep. 594 (1891). 

135 125 U. S. 6o, 8 Sup. Ct. Rep. 772 (1888). This case held also that a state could 
tax the shares of a national bank even when owned by other national banks. 

136 125 U. S. 60, 68, 8 Sup. Ct. Rep. 772 (1888). 

137 166 U. S. 440, 17 Sup. Ct. Rep. 629 (1897). 

138 "The conclusions to be deduced from these decisions are that money invested 
in corporations or in individual enterprises that carry on the business of railroads, 
of manufacturing enterprises, mining investments, and investments in mortgages 
does not come into competition with the business of national banks, and is not there- 
fore within the meaning of the act of Congress; that such stocks as those in insurance 
companies may be legitimately taxed on income instead of on value, because such 
companies are not competitors for business with national banks; and that exemptions, 
however large, of deposits in savings banks, or of moneys belonging to charitable 
institutions, if exempted for reasons of public policy and not as an unfriendly dis- 
crimination against investments in national bank shares, should not be regarded as 
forbidden by U. S. Rev. Stat. § 5219." 166 U. S. 440, 460-61 (1897). 

139 166 U. S. 440, 462, 17 Sup. Ct. Rep. 629 (1897). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 361 

think that possibly some of the loans and securities held by citizens 
of the country might be "moneyed capital," but nevertheless sus- 
tained the demurrer on the ground that "as against the pleader, 
we may well assume that they belong to a class of investments 
which does not compete with the business of national banks 

Though somewhat varying reasons have been given for the de- 
cisions subsequent to the Mercantile Bank Case, the Whitbeck 
Case is the only one in which the Supreme Court has invalidated a 
tax on shares of national banks where the discrimination in favor 
of other moneyed capital was not in favor of shares in state banks. In 
only two other cases has the charge of discrimination been sustained. 
In San Francisco National Bank v. Dodge™ the majority of the 
court found that, while the assessment of shares of stock m national 
banks included the elements of value contributed by "good-will, 
dividend earning power, the ability with which the corporate 
affairs were managed, the confidence reposed in the capacity and ^ 
permanence of tenure of the officers, and all those other indirect 
and intangible elements of value which enter into the estimate of 
the worth of the stock, and help to fix the market value or selling 
price of the shares," 142 the taxation of state banks on their property 
only with exemption of their shares, did not take account of these 
intangible elements of value. A bill to restrain the enforcement of 
taxes on the shares of the national banks was therefore sustained. 

ho l6 6 U S. 440, 461, 17 Sup. Ct. Rep. 629 (1897). This assumption as totheloans 
and securities and possibly also the decision as to stocks of insurance companies seem 
to be J inconsistent with the statement in the Mercantile Bank Case as to what was m- 
cluded in the term "moneyed capital." In the opinion m that case m 121 U. S. 138, 
S7 Mr. Justice Matthews says: "The terms of the Act of Congress, therefore mclude 
ahl es of stock or other interests owned by individuals in all ente^nses m whxch the 
cap tal employed in carrying on its business is money, where the object of the busmes 
isAe maHng of profit by its use as money. The moneyed capital thus employed is 
investeTfor that purpose in securities by way of loan, discount, or otherwise, which 
aTfrom time to S according to the rules of the business, reduced again to money 
and reinvested. It includes money in the hands of individuals employed in a similar 
wTy, invested in loans, or in securities for the payment of money either as an mvest- 
ment of a permanent character, or temporarily with a view to sale or repayment and 
Reinvestment. In this way the moneyed capital in the hands of individuals is dis- 
tng'^d from what is known generally as personal property » In deciding wha 
property comes into competition with national banks, some of the later cases have 
dven Jn effect an even more restricted interpretation of "other moneyed capital 
than was put forward in the Mercantile Bank Case. See p. 363, ™J™- 

141 197 U. S. 70, 25 Sup. Ct. Rep. 384 (1905). 

142 797 U. S. 70, 80, 25 Sup. Ct. Rep. 384 (1905). 



362 HARVARD LAW REVIEW 

The minority, consisting of Mr. Justice Brewer, who wrote the 
dissenting opinion, Chief Justice Fuller and Justices Brown and 
Peckham, differed from their brethren with respect to the values 
reached by the method of assessing state banks, and with respect 
to the propriety of equitable relief. In Covington v. First National 
Bank, 143 a retroactive provision in a Kentucky statute, relating 
solely to shares of stock in national banks, by which such banks 
were charged with liability for taxes for past years, was also held 
an invalid discrimination against shares of national banks. These 
two discriminations related to liability to taxation and to methods 
of valuation. 

With respect to variations in the methods of assessing shares in 
national banks and other property that admittedly comes into 
competition with national banks, the court has required complain- 
ants to show that the variation in methods actually operates to 
discriminate. In Davenport National Bank v. Board of Equaliza- 
tion 144 the proposition of counsel that savings banks and national 
banks must be taxed in the same way was explicitly negatived. 
"The Act of Congress does not require a perfect equality of taxation 
between state and national banks, but only that the shares of national 
banks shall not be taxed at a higher rate than other moneyed 
capital in the hands of individuals." 145 In First National Bank of 
Wellington v. Chapman 146 complaint was made of discrimination 
in favor of unincorporated bankers, because they were allowed to 
deduct their debts, while owners of national bank shares were not. 
But the court found that the only debts so deducted were those 
incurred in the banking business, and that the deduction of such 
debts was necessary to determine the real value of the capital em- 
ployed by the unincorporated banker. The provision that the shares 
of national banks should be listed at their true value in money 
was held to require the deduction of the liabilities of a national 
bank from its resources in the assessment of its shares, so that there 
was no discrimination in favor of the unincorporated banker. 

"That mathematical equality is not arrived at in the process is imma- 
terial. It cannot be reached in any system of taxation, and it is useless 

143 198 U. S. 100, 25 Sup. Ct. Rep. 562 (1905). 

144 123 U. S. 83, 8 Sup. Ct. Rep. 73 (1887). 

145 123 U. S. 83, 85, 8 Sup. Ct. Rep. 73 (1887). 

146 173 U. S. 205, 19 Sup. Ct. Rep. 407 (1899). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 363 

and idle to attempt it. Equality, so far as the differing facts will permit, 
and as near as they will permit, is all that can be aimed at or reached. 
That measure of equality we think is reached under this system." 147 

The fact that unincorporated bankers were not assessed for fran- 
chise value while shares of national banks included such value 
was held to be immaterial, since such value existed in the case of 
national banks and did not exist in the case of unincorporated 
bankers. And in Amoskeag Savings Bank, 148 in dealing with de- 
ductions for debts, Mr. Justice Pitney said of the federal statute: 

"The language clearly prohibits discrimination against shareholders 
in national banks, and in favor of shareholders in competing institutions, 
but it does not require that the scheme of taxation shall be so arranged 
that the burden shall fall upon each and every shareholder alike, without 
distinction arising from circumstances personal to the individual." 149 

The opinion in the Amoskeag Case says also that "the holders 
of shares in state banks are subjected to precisely the same taxa- 
tion, and with respect to other competitive institutions, such as 
trust companies, the franchise taxes imposed upon them appar- 
ently result in a substantially similar burden upon the share- 
holder." 150 Thus trust companies are assumed to be institutions 
which compete with national banks. In Jenkins v. Neff, 151 how- 
ever, decided eleven years earlier, the Supreme Court dismissed 
an alleged discrimination in favor of trust companies on the ground 
that, since the New York statute did not give to New York trust 
companies "power to loan, discount or purchase paper," they were 
not in competition with national banks. 152 It was suggested by 
complainant that in fact they exercised those powers. But the 
court answered that it would assume that the state would take 
proper steps to keep the trust companies within their proper 
limits, and that a neglect for a limited time cannot be deemed an 
assent by the state to an improper assumption of power. The 
opinion in the Supreme Court did not state the discriminations 

147 173 U. S. 205, 216, 19 Sup. Ct. Rep. 407 (1899). 

148 Note 128, supra. 

149 231 U. S. 373, 393-94, 34 Sup. Ct. Rep. 114 (1913). 

150 231 U. S. 373, 39i"93> 34 Sup. Ct. Rep. 114 (1913). 
m 186 U. S. 230, 22 Sup. Ct. Rep. 905 (1902). 

162 This view of trust companies was also taken in Bank of Redemption v. Boston, 
note 135, supra. The statement ki that case had reference to exemption of the 
shares of stock in trust companies as well as of their capital. 



364 HARVARD LAW REVIEW 

alleged, but from the opinions in the same case in the Appellate 
Division and Court of Appeals of New York 153 it appears that ob- 
jection was made to the fact that trust companies were allowed to 
deduct from the assessment of their capital an amount equivalent 
to their investment in non-taxable securities, while owners of stock 
in national banks had no corresponding privilege. Such a con- 
tention of course denies the validity of the distinction between 
taxes on shares and taxes on capital, which was asserted in the 
Van Allen Case 154 and has been consistently followed. 155 The con- 
tention also denies the position that taxes on the capital of cor- 
porations are not taxes on moneyed capital in the hands of indi- 
vidual citizens. 156 So there were two established grounds upon 
which to reach the decision in Jenkins v. Neff without declaring in 
effect that no discrimination whatever in favor of trust compa- 
nies would be within the limitation in the congressional permission 
to tax shares of national banks. But this seems to be the doctrine 
of the case in both the Supreme Court and the state courts. The 
opinion in the New York Court of Appeals relied on a quotation 
from the opinion in the Mercantile Bank Case to the effect that 
"it is evident, from this enumeration of powers [conferred by the 
New York statute] that trust companies are not banks in the com- 
mercial sense of that word, and do not perform the functions of 
banks in carrying on the exchanges of commerce." 157 But that 
declaration in the Mercantile Bank opinion is followed by the 
statement that the trust companies deal in money and securities 
"in such a way as properly to bring the shares of stock held by 
individuals therein within the definition of moneyed capital in the 
hands of individuals, as used in the Act of Congress." 158 

153 Jenkins v. Neff, 62 N. Y. Supp. (96 N. Y. St. Rep.) 321 (1900); id., 163 N. Y. 
320 (1900). 

154 Note 58, supra. 

155 See cases cited in notes 62 and 108, supra. 

156 See cases cited in notes 104 and 135, supra. 

157 121 U. S. 138, 159, 7 Sup. Ct. Rep. 826 (1887). Quoted in 163 N. Y. 320, 329. 
168 121 U. S. 138, 159 (1887). In applying this to the facts in the Mercantile Bank 

Case the court said: "But we fail to find in the record any sufficient ground to believe 
that the rate of taxation, which in fact falls upon this form of investment of moneyed 
capital, is less than that imposed upon the shares of stock in national banks." The 
reason given was that the capital of trust companies is required to be assessed at its 
actual value which "is ascertained by reference, among other standards, to the market 
price of its shares, so that the aggregate value of the entire capital may be the market 
price of one multiplied by the whole number of shares." It is recognized, however, 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 365 

It is apparent from the foregoing review that the Supreme Court 
has not been uniformly satisfied to rest its decisions upon a legal 
definition of the term "other moneyed capital" as used by Congress. 
The unusual definition evolved in the Mercantile Bank Case was 
evidently the product of economic considerations. It was due to 
a desire to exclude formal legal discriminations which did not in 
fact operate to the disadvantage of national banks as instrumen- 
talities of the national government. The normal meaning of 
"other moneyed capital" was disregarded in favor of an artificial 
meaning that took into account economic considerations which 
the court thought must have been in the mind of Congress. Yet 
in applying this restricted definition of "other moneyed capital," 
the opinion in the Mercantile Bank Case was not wholly consistent 
with itself. For it calls municipal bonds and deposits in savings 
banks "moneyed capital," 159 and still dismisses their exemption 
as immaterial. The court then, as later, labored under difficulties 
in relying exclusively and consistently on its legal definition of 
"other moneyed capital." 

that "from this are to be deducted, of course, the real estate of the corporation, other- 
wise taxed, and the value of such part of the capital stock as is invested in non-taxable 
property, such as securities of the United States." Such deductions from taxation 
of capital stock of state banks was held in Van Allen v. Assessors, note 78, supra, 
to render the tax on the capital of the state banks not equivalent to the tax on the 
shares of national banks. The opinion in the Mercantile Bank Case on the point 
under consideration does not refer to the Van Allen Case, or answer the objection 
there sustained, except by indirection. It states as a fact that, in addition to the 
tax on the capital of a trust company, the corporation pays to the state "as a state 
tax, a tax upon its franchise based upon its income; the tax on the capital being for 
local purposes." Whether this resulted in imposing on trust companies taxes equivalent 
to those on shares of stock in national banks would of course depend upon whether 
the actual amount of the tax on the franchise was equivalent to the deduction from 
the tax on the capital by reason of the holdings of United States bonds. 

159 "Bonds issued by the State of New York, or under j its authority by its public 
municipal bodies . . . are not taxable even by the United States. . . . Such securi- 
ties undoubtedly represent moneyed capital, but as from their nature they are not 
ordinarily the subjects of taxation, they are not within the reason of the rule estab- 
lished by Congress for the taxation of national bank shares." 121 U. S. 138, 162, 
7 Sup. Ct. Rep. 826 (1887). 

"However large, therefore, may be the amount of moneyed capital in the hands 
of individuals, in the shape of deposits in savings banks as now organized, which the 
policy of the State exempts from taxation for its own purposes, that exemption cannot 
affect the rule for the taxation of shares in national banks, provided they are taxed 
at a rate not greater than other moneyed capital in the hands of individuals otherwise 
subject to taxation." 231 U. S. 157, t6i, 34 Sup. Ct. Rep. 46 (1913). See also note 
101, supra. 



366 HARVARD LAW REVIEW 

Perhaps a more acceptable ground for decisions involving 
exemptions, deductions of debts, and variations in methods of 
assessment other than in rates of levy would be that such alleged 
discriminations are not within the letter of the prohibition against 
taxing national bank shares "at a greater rate" than other mon- 
eyed capital, and that whether such alleged discriminations come 
within the spirit of the statute must depend on whether their 
effect is to impose a substantial discrimination against money in- 
vested in national banks. Common-sense would then require the 
court to hold that the exemption of any particular legal res was 
unimportant so long as there was taxation of the economic value 
behind that res. Exemption of shares of stock is therefore unim- 
portant when there is taxation of the franchise and capital of the 
corporation. 160 Exemption of the franchise and capital is unim- 
portant where there is taxation of the shares. 161 Exemption of 
mortgages or money due for the sale of real estate is unimportant, 
so long as the real estate or other property mortgaged is taxed. 162 
Exemption of federal securities could be disregarded because the 
federal government would suffer less from the taxation of only one 
of its instrumentalities than from the taxation of two. 163 Exemp- 
tion of state and municipal securities could be disregarded, because 
the exemption affects the rate at which the state may borrow. 164 
If the securities were taxable they would bear a correspondingly 
higher rate of interest and the net result to the individuals and to 
the state would be substantially similar to the effect of their ex- 
emption. Exemption of deposits could be disregarded because 
the banks are taxed on the investments made with those deposits. 165 
And such other exemptions or variations in methods of assessment 
as might appear in the taxing laws of any state could doubtless be 
excused on the ground that they were so slight as not to interfere 
with the substantial equality between assessment of shares in 
national banks and that of other moneyed capital. 166 The only 
burden that can be imposed on national banks is through taxation 

160 Amoskeag Savings Bank, note 150, supra. 

161 Adams v. Nashville, note 118, supra. 

162 Hepburn v. School Directors, note in, supra. 

163 People ex rel. Duer v. Commissioners of Taxes, note 104, supra. 

164 Mercantile National Bank v. New York, note 159, supra. 

165 Ibid., note 93, supra. 

166 See cases cited in notes in, 114, 125 and 128, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 367 

of their real estate and their shares of stock. So long as substan- 
tially equivalent burdens are imposed on all other economic values 
by taxation of tangible property and of the capital and franchises 
of corporations, it would be absurd to insist that the exemption 
of one or more of the legal forms of property in which those values 
may be represented, results in taxing shares in national banks at 
a greater rate than that imposed on other moneyed capital. The 
rule of the Mercantile Bank Case practically comes down to a dis- 
regard of formal legal discrimination where there is in fact no 
substantial economic discrimination. 

The cases on the subject under discussion prevent a state from 
imposing heavier burdens on shares in national banks than on 
shares in state banks. But the attempts of the state are frus- 
trated, not because they would hamper the power of the national 
government to borrow money, but because, by encouraging capital 
to invest in state banks rather than in national banks, they would 
interfere with the latter as instrumentalities of the national gov- 
ernment. And the only question which has been considered was 
whether the discriminations alleged came within the prohibition of 
Congress. The point that, owing to the large holdings of United 
States bonds in the vaults of the national banks, the state may 
by indirection impose heavier burdens on investments in federal 
securities than on other forms of property is not discussed. 167 
This point raises a problem which arises independently of the 
question whether any method of taxation interferes with the 
banks as instrumentalities of government. And the solution 
must be sought, not in the language of a congressional enactment, 

167 The nearest approach to a discussion of this question is in Jenkins v. Neff, 
note 151, 236-37, supra, where Mr. Justice Brewer quotes from the opinion of the 
same case in the appellate division of New York some remarks, which he says "in 
general we approve." In the appellate division Judge Woodward said: "The fact 
that in a given instance, by reason of an exercise of discretion as to the particular kind 
of securities purchased, a trust Company may have a real or imaginary advantage over 
investors in the shares of national banks is not a sufficient foundation for declaring the 
assessment invalid." (Quoted from 62 N. Y. Supp. 321, 327.) And then he adds: 
"If the state refused to allow its trust companies to invest in United States securities 
there might be a far greater cause for grievance." (Quoted from 62 N. Y. Supp. 321, 
328.) Any such cause for grievance would of course be a discrimination, not against 
national banks as federal instrumentalities, but against the federal borrowing power. 
And heavier state taxation of shares and franchises of corporations owning federal 
securities than of those of corporations not owning such securities would differ only 
in degree from prohibition of investment in such securities. 



368 HARVARD LAW REVIEW 

but in principles inhering in the federal system of government. 
Only by inference and analogy do the cases on the interpretation 
of the statute of Congress touch the question whether the imposi- 
tion of heavier burdens on the franchises and shares of corpora- 
tions owning federal securities than on other intangibles or on 
chattels and real estate can be regarded as an interference with 
the power of the United States to borrow money. 

Yet the inference and the analogy are unescapable. If shares of 
stock in national banks whose capital is invested largely in federal 
securities may be taxed more heavily than other legal forms of 
property, manifestly the state may discriminate in like manner 
against the franchises and shares of other corporations owning 
federal securities. For, in the former instance, the discrimination 
may be adduced as an interference with two functions of the 
national government, whereas in the latter the question can be 
raised only with respect to one. It may therefore be taken as 
established that exemption of many kinds of property from state 
taxation does not deprive the state of power to tax franchises and 
shares of corporations having investments in federal securities. 

Had the Supreme Court followed the implications of its declara- 
tions in Boyer v. Boyer, 168 it would have been compelled to pass 
judgment on the almost innumerable details of the taxing system 
of every state. The states would doubtless have been driven to 
abandon any attempt to tax shares of stock in national banks. 
The silence of Congress after the restricted interpretation put upon 
the phrase "other moneyed capital" is sufficient ratification of the 
existing rule as to taxation of shares in national banks. And this 
applies a fortiori to the absence of any rule that taxation of shares 
in corporations owning federal securities must be accompanied by 
similar taxation of all other forms of property. Any possible dis- 
crimination against the federal borrowing power is one that Con- 
gress might in all probability by direct legislation prevent. Con- 
gress evidently is satisfied with the exemption of United States 
bonds from direct taxation. This exemption, coupled with the 
fact that corporations engaged in mining, manufacturing, trade 
and transportation are almost invariably taxed, both on their 
franchises and on all their property with the exception of that 
invested in public securities, makes the absence of any tax on 

168 Note oo, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 369 

their shares of stock of little practical importance. The value in- 
vested in federal securities may be molested only by taxation of 
the franchises and shares of stock of corporations which may own 
such securities. Such securities in the hands of individuals con- 
tribute nothing to the state use. Those in the hands of corpora- 
tions cannot be taxed directly. In view of the extent to which 
individuals and corporations are taxed on all other kinds of prop- 
erty, it is most unlikely that exemptions here and there allowed, 
operate in any way to obstruct or discriminate against the federal 
borrowing power. Such occasional and isolated inequalities as 
may exist to the disadvantage of property which derives its value 
from United States bonds must be greatly outweighed by the ag- 
gregate of the many burdens borne by property in no way related 
to any interest of the federal government. The theoretical possi- 
bility of discrimination left open by the decisions is not destined 
to be realized in the actual results of the fiscal policy of any state. 

4. Summary and Conclusion 

In dealing with the problem whether taxes on shares of stock 
in national banks violate the permission granted to the states by 
Congress, the Supreme Court has avoided a dryly literal interpre- 
tation of the federal statute. It has expanded the words "at a 
greater rate" to make them include all forms of discrimination, 
and has restricted the natural meaning of "other moneyed cap- 
ital" to confine it to capital which comes into fairly direct com- 
petition with national banks. In determining the significance of 
alleged discriminations in favor of other property, it has not been 
content to observe merely whether the state has failed to impose 
an equal burden on some other legal res which the law calls prop- 
erty and which in general it would call moneyed capital. In 
expanding one phrase of the statute and contracting the other, the 
judges have looked through legal form to economic substance. 
Any interpretation of "other moneyed capital" which excludes 
money loaned at interest or invested in insurance companies and 
trust companies must be due to other than verbal considerations. 
Nor is such an interpretation the product of an analysis of the 
legal characteristics of the property so excluded. It is reached by 
considering the economic relations of such property to that in- 
vested in national banks. The court has been concerned with 



370 HARVARD LAW REVIEW 

economic effects rather than with legal names, though it has felt 
compelled to label those economic effects according to legal no- 
menclature. As has been pointed out, this was not a necessary- 
mode of procedure. Most of the alleged discriminations with 
which the court has had to deal have not fallen within the express 
terms of the limitations imposed by Congress. In deciding the 
cases which did not involve variations of rates where there were 
similar methods of assessment, the court could have sustained the 
tax on the shares of national banks without denying that the 
property with which the shares were compared was moneyed 
capital. The same decisions could have been reached by informing 
the complainant that he had not brought himself within the letter 
of the statute, and that by reason of economic considerations he 
had not brought himself within its spirit. The fact that the court 
has chosen to call its inquiry an interpretation of the meaning of 
language should not blind us to the considerations which have 
controlled its decisions. It has really been concerned, not with 
the legal characteristics of the property adduced for comparison, 
but with what gave value to that property. 

When, however, we turn to the cases where no complaint is 
made of discrimination against a federal instrumentality, we find 
the legal characteristics of the subject taxed, of more controlling 
importance. As the law now stands, the test of whether a state 
tax is an interference with the federal borrowing power, is what 
subject is taxed, and not what gives value to the subject taxed or 
what determines the amount of the tax. The capital of a corpora- 
tion is treated as but a name for the property of the corporation. 169 
So a tax on the capital is a tax on the property in which it is in- 
vested. To the extent that such property consists of federal 
securities, it is totally outside the taxing power of the state. The 
shares of stock are a kind of property totally distinct in law from 
the property of the corporation. A tax on such shares is not re- 
moved from the power of the state even though its economic effect 
on the borrowing power of the United States is indistinguishable 
from that of a tax on the capital of the corporation or specifically 
on United States securities. 

169 "The capital stock is nothing; a myth; a mere name, excepting in so far as it 
is represented by investments made with the money paid into the treasury of the 
corporation on account of such capital stock." Mr. Justice Paxon, in Appeal of Fox 
& Wife, 112 Pa. St. 337, 554, 4 Atl. 149 (1886). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 371 

This legalistic formalism appears subversive of the very basis 
on which rests the doctrine of the exemption of federal instru- 
mentalities from state taxation. As Mr. Justice Strong said in 
Railroad Company v. Peniston: 17 ° 

"It is, therefore, manifest that exemption of federal agencies from 
state taxation is dependent, not upon the nature of the agents, or upon 
the mode of their constitution, or upon the fact that they are agents, but 
upon the effect of the tax; that is, upon the question whether the tax does 
in truth deprive them of power to serve the government as they were 
intended to serve it, or does hinder the efficient exercise of their power." m 

All this applies mutatis mutandis to the exemption of federal securi- 
ties from state taxation. Such exemption should depend, not on 
the nature of the property named by the state as the subject on 

170 18 Wall, 5 (1873). 

171 18 Wall, 5, 36 (1873). Italics are author's. The economic argument was here 
used, however, to determine whether the subject on which the tax was levied could 
be regarded as a federal instrumentality. It was held that a tax on the property of a 
railroad corporation chartered by the federal government and subject to a large 
degree of control by the federal government was not an interference with the exercise 
of any power belonging to the federal government, and therefore not a tax on a federal 
instrumentality. The majority distinguished McCulloch v. Maryland (4 Wheat. 316) 
and Osborn v. Bank (9 Wheat. 738) on the ground that the taxes there held invalid 
were on the operations of a federal agency, and not on the property of a federal agent. 
Mr. Justice Bradley for the minority insisted that the relation between the Union 
Pacific and the federal government was such that the property of the road was an 
agency of the government. He argued that, if the roadbed might be taxed, it might 
be sold for non-payment of the tax and that this would prevent the road from fulfilling 
its obligations to the federal government. To tax the roadbed, he said, is to tax the 
very instrumentality which Congress desired to establish, since the track is as essential 
to the operations of the road "as the use of a currency, or the issue or purchase of 
bills of exchange is to the operations of a bank." The dispute between the majority 
and the minority was not whether a tax on a proper subject was invalid because of 
the inclusion of improper elements in assessing its value, but whether the subject 
taxed was itself an agency of the federal government. 

In accord with Railroad Company v. Peniston, in sustaining taxes on property 
privately owned but used in performing services for the United States, are Baltimore 
Shipbuilding Co. v. Baltimore, 195 U. S. 375, 25 Sup. Ct. Rep. 50 (1904) and Gromer 
v. Standard Dredging Co., 224 U. S. 382, 32 Sup. Ct. Rep. 499 (1912). See also 
Ackerlind v. United States, 240 U. S. 531, 36 Sup. Ct. Rep. 438 (1916). State taxes 
have been held void where the subject taxed was a franchise obtained from the United 
States, California v. Central Pacific Railroad Co., 127 U. S. 1, 8 Sup. Ct. Rep. 1073 
(1888), or included the business of sending telegraph messages for the United States, 
Williams v. Talledega, 226 U. S. 404, ^ Sup. Ct. Rep. 116 (1912). For a case declaring 
invalid a method of collecting a valid tax because the method interfered with an instru- 
mentality of the national government, see Western Union Telegraph Co. v. Massachu- 
setts, 125 Mass. 530 (1888). 



372 HARVARD LAW REVIEW 

which the tax falls, but on the effect of the tax. Otherwise the 
state by- legislative legerdemain may make a tax on a federal in- 
strumentality seem to be something different from what it really 
is, and thus do indirectly what it is forbidden to do directly. 

It may, however, be doubted whether the Supreme Court has 
been as unmindful of economic considerations as some of its decla- 
rations would imply. It may be that the effect of the tax varies 
with the kinds of property on which it is levied. It may be also 
that the effect of the taxes which have been declared invalid was 
not so serious as was supposed and that the court has adopted 
technical legal distinctions in order to limit as narrowly as possible 
the economic effect of the earlier decisions. It is possible, too, that 
any decision on the subject under consideration must be in the 
nature of a somewhat arbitrary compromise between maintaining 
the interests of the nation and yet not unduly restricting the re- 
sources of the state. These suggestions will again be adverted to 
after consideration has been given to the cases on state taxation 
as an indirect regulation of interstate commerce. 

(To be continued.) 

Thomas Reed Powell. 
Columbia University. 



572 HARVARD LAW REVIEW 



INDIRECT ENCROACHMENT ON FEDERAL 
AUTHORITY BY THE TAXING POWERS 
OF THE STATES. 1 II 

II. Regulations of Interstate Commerce 

THE doctrine that a state cannot tax interstate commerce is 
derived from an interpretation of the clause in the Con- 
stitution granting to Congress the power to regulate such commerce. 
The steps in this interpretation are the declarations that taxation 
of commerce is a regulation thereof, 2 that the state cannot regulate 
those subjects of interstate commerce which are national in char- 
acter, 3 and that exchange and transportation of commodities 
between the states are national in character. 4 State taxation 
which falls directly on exchange and transportation between the 
states has uniformly been held beyond the power of the state. 5 On 
the other hand, property within the state, 6 privileges granted by 
the state, 7 and intra-state commerce done within the state 8 are 
uniformly held proper subjects of state taxation. If the power to 

1 For the general introduction to this discussion and for the first section dealing 
with "Interferences with Federal Instrumentalities," see 31 Harv. L. Rev. 321-72 
(January, 1918). 

2 The Passenger Cases, 7 How. 283 (1849). 

3 Cooley v. Board of Wardens of Philadelphia, 12 How. 299 (1851). 

4 Welton v. Missouri, 91 U. S. 275, 280 (1876). 

8 Case of the State Freight Tax, 15 Wall. (82 U. S.) 232 (1873); Gloucester Ferry 
Co. v. Pennsylvania, 114 U. S. 196, 5 Sup. Ct. Rep. 826 (1885); Robbins v. Shelby 
County Taxing District, 120 U. S. 489, 7 Sup. Ct. Rep. 592 (1887); Philadelphia & 
Southern Mail S. S. Co. v. Pennsylvania, 122 U. S. 326, 7 Sup. Ct. Rep. 1118 (1887); 
Leloup v. Port of Mobile, 127 U. S. 640, 8 Sup. Ct. Rep. 1380 (1888); McCall v. Cali- 
fornia, 136 U. S. 104, 10 Sup. Ct. Rep. 881 (1890); Crutcher v. Kentucky, 141 U. S. 
47, n Sup. Ct. Rep. 851 (1891). 

6 Brown v. Houston, 114 U. S. 622, 5 Sup. Ct. Rep. 1091 (1885). 

7 Cases cited in notes 21, 23, ^^, 35, 38, infra. 

8 Home Machine Company v. Gage, 100 U. S. 676 (1880); Ratterman v. Western 
Union Telegraph Co., 127 U. S. 411, 8 Sup. Ct. Rep. 1127 (1888).; Pacific Express Co. 
v. Seibert, 142 U. S. 339, 12 Sup. Ct. Rep. 250 (1892); Emert v. Missouri, 156 U. S. 
296, 15 Sup. Ct. Rep. 367 (1895); Williams v. Fears, 179 U. S. 270, 21 Sup. Ct. Rep. 
128 (1900); Kehrer v. Stewart, 197 U. S. 60, 25 Sup. Ct. Rep. 403 (1905). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 573 

tax necessarily involved the power to destroy, 9 if the question 
were entirely one of power and not at all one of economics, 10 it 
would follow that no tax on these subjects could be held invalid 
as a regulation of interstate commerce. 

Though the maxims quoted would preclude inquiry into the 
effect on interstate commerce of a tax imposed on a subject within 
the authority of the state, the inquiry is logically permissible. We 
may grant that a tax on a subject of interstate commerce is a 
regulation of such commerce. We may concede that some taxes 
levied on other subject matters are not regulations of interstate 
commerce. But we may still inquire whether other taxes on sub- 
jects not themselves interstate commerce may not properly be 
regarded as regulations of interstate commerce. And the Supreme 
Court holds that taxes on subjects not themselves interstate com- 
merce are nevertheless regulations of such commerce, where in 
effect they discriminate against interstate commerce in favor of 
intra-state commerce. 

1 . Taxes Discriminating against Interstate Commerce 

In Welton v. Missouri u the court held invalid a state statute 
imposing a tax nominally on peddlers, but defining a peddler as 
one who peddles goods which are not the growth, produce, or 
manufacture of the state. Mr. Justice Field declared that any 
tax which was levied on the sale of goods for the reason that they 
originated in other states was invalid as a regulation of interstate 
commerce. In answer to the contention of the state that the goods 
in question were no longer in the original packages, he said that the 
commercial power of Congress over commodities which have been 
brought into a state from other states "continues until the com- 
modity has ceased to be the subject of discriminating legislation 
by reason of its foreign character." 12 A similar doctrine was laid 
down in Darnell v. Memphis™ which held that a state could not, 

9 Chief Justice Marshall in McCulloch v. Maryland, 4 Wheat. 316, 431 (1819). 
See 31 Harv. L. Rev. 321. 

10 Mr. Justice Moody in Home Savings Bank v. Des Moines, 205 U. S. 503, 518, 
27 Sup. Ct. Rep. 571 (1907). See 31 Harv. L. Rev. 343. 

11 91 U. S. 275 (1876). 

12 91 U. S. 275, 282 (1876). 

13 208 U. S. 113, 28 Sup. Ct. Rep. 247 (1908). For other cases affirming the doc- 
trine that a state cannot by taxation discriminate against interstate commerce, see 



574 HARVARD LAW REVIEW 

by exempting from its general property-tax, articles which were 
manufactured from the produce of the state, impose such a tax 
solely on goods manufactured from the produce of other states. 

In these decisions the state tax was declared invalid as a regula- 
tion of interstate commerce, though the subjects of taxation were 
sales of goods within the state and personal property located within 
the state. In both cases the articles had lost their interstate char- 
acter before they or their sales had become subject to the statute 
of the state. They were within the taxing power of the state in 
the same manner and to the same extent as articles of domestic 
origin were within the power of the state. 14 But the economic result 
of imposing heavier taxes on goods and the sales of goods of extra- 
state origin than on those of intra-state origin was to burden the 
future introduction of merchandise from other states, and thus to 
give an economic advantage to domestic producers. In deciding 
these cases, therefore, the Supreme Court applies an economic 
test to determine whether taxes, levied on subjects not in them- 
selves interstate commerce, are nevertheless regulations of inter- 
state commerce. In substance it declares a tax invalid solely be- 
cause of objection to the measure by which the amount of the tax 
is determined. If the rate imposed had not been higher than that 
applied to goods of domestic origin, the tax would have been sus- 
tained. The taxes held unconstitutional would be made entirely 
valid by the imposition of similar taxes on goods of domestic origin. 

2. Taxes not Discriminating against Interstate Commerce 

If a state tax falls directly on a subject of interstate commerce, 
it is invalid notwithstanding the fact that the identical tax is 

Pierce v. The State, 13 N. H. 536, 582 (1843), semble; State v. North & Scott, 27 Mo. 
464 (1858); Guy?). Baltimore, 100 U. S. 434 (1880); Tiernan v. Rinker, 102 U. S. 123 
(1880) ; Walling v. Michigan, 116 U. S. 446, 6 Sup. Ct. Rep. 454 (1886); and Ex parte 
Stoddard, 35 Nev. 504, 131 Pac. 133 (1913). See also Hall, Cases On Constitutional 
Law, 1086, note 1. For cases sustaining seeming discriminations against interstate 
commerce, on the ground that the state had based its differences of treatment on a 
proper classification under the police power, see McGuire v. State, 42 Ohio St. 530 
(1885); Reyman Brewing Co. v. Brister, 179 U. S. 445, 21 Sup. Ct. Rep. 201 (1900); 
Cox v. Texas, 202 U. S. 446, 26 Sup. Ct. Rep. 671 (1906); and State v. Parker Dis- 
tilling Co., 236 Mo. 219, 139 S. W. 453 (191 1). 

14 A non-discriminatory tax on goods of extra-state origin was sustained in Brown 
v. Houston, note 6, supra. A tax on all peddlers was sustained in Emert v. Missouri, 
note 8, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 575 

imposed on corresponding intra-state commerce. "Interstate 
commerce cannot be taxed at all, even though the same amount of 
tax should be laid on domestic commerce, or that which is carried 
on solely within the state." 15 The question is treated as one of 
power and not of economics. The Supreme Court fixes its attention, 
not upon the economic results of the tax, but upon the legal res 
which is declared by the statute to be the subject on which the 
tax is imposed. This is not to say that economic considerations 
have been entirely neglected in determining what subjects of 
taxation are to be regarded as in themselves interstate commerce. 
But what the court considers in this connection is not the burden 
imposed by the particular tax before it, but the burden which would 
result if the subject were taxed to the point of extinction. 

Where, however, the subject on which the tax is imposed is not 
itself interstate commerce, it is manifest that only by recourse to 
its economic effect on interstate commerce could it be declared a 
regulation of such commerce. But, with the exception of the cases 
involving discriminations against interstate commerce, the early 
decisions of the Supreme Court did not regard as important the 
measure by which the amount of a tax was determined, provided 
the subject on which the tax was levied was within the authority 
of the state. The subjects of taxation with which these cases have 
been concerned are acts, occupations, property, and privileges. 
The questions under consideration could of course arise only when 
the property was employed in interstate commerce, when the act 
or occupation was conducted in some connection with interstate 
commerce, or when the privilege was enjoyed by those engaged 
in whole or in part in interstate commerce. 

A. TAXES ON PRIVILEGES 16 

It has never been urged that taxes on inheritances were regula- 
tions of interstate commerce, even when the property passing 

15 Mr. Justice Bradley in Robbins v. Shelby County, note 5, supra. 

16 "Privilege" is here used in the sense of some permission obtained from the 
state which might have been entirely withheld. The two such privileges involved in 
the decisions to be considered are the privilege of being a domestic corporation and 
the privilege of a foreign corporation to exercise its corporate powers within the state 
for the conduct of business which is not interstate commerce. "Privilege" is often 
used in a broader sense in speaking w of "privilege taxes." See Mr. Justice Harlan in 
Western Union Telegraph Co. v. Kansas, 216 U. S. 1, 43, 30 Sup. Ct. Rep. 190 (1910): 



576 HARVARD LAW REVIEW 

by the inheritance derived its value from some connection with 
interstate commerce. The privilege taxes which have been chal- 
lenged as regulations of interstate commerce have been those 
levied on the privileges of being a corporation, or of exercising 
corporate powers within the state. The state may decline to 
create a corporation. It may decline to permit a foreign corpora- 
tion to enter the state to carry on intra-state commerce. From 
the power of the state to forbid has been inferred the power to 
burden as it pleases. 

(a) The Doctrine of Unlimited Power 

In State Tax on Railway Gross Receipts, 17 decided in 1872, the 
court sustained a Pennsylvania statute imposing on every rail- 
road company incorporated under the laws of Pennsylvania a 
tax of three-fourths of one per centum upon the gross receipts of 
said company. One of the grounds on which the decision was 
based is thus stated in the opinion of the court: 

"It is not to be questioned that the States may tax the franchises 
of companies created by them, and that the tax may be proportioned 
either to the value of a franchise granted, or to the extent of its exercise; 
nor is it deniable that gross receipts may be a measure of proximate 
value, or, if not, at least of the extent of enjoyment. If the tax be, in 
fact, laid upon the companies, adopting such a measure imposes no greater 
burden upon any freight or business from which the receipts come than 
would an equal tax laid upon a direct valuation of the franchise. In 
both cases, the necessity of higher charges to meet the exaction is the 
same." 18 

It is to be noted that Mr. Justice Strong cites no authority for 
this doctrine that the state may measure a tax on corporate fran- 

"Any occupation, business, employment, or the like, affecting the public, may be 
classed and taxed as a privilege," citing Knoxville & O. R. Co. v. Harris, 99 Tenn. 
684, 43 S. W. 115 (1897). Privilege taxes of this more general character will be dealt 
with in a succeeding section under the head of "taxes on acts and occupations." 

» 15 Wall. (82 U. S.) 284 (1873). 

18 15 Wall. 284, 296 (1873). The other reason given for the decision was that the 
tax was laid "upon a fund which has become the property of the company" and 
"which has lost its distinctive character of freight earned, by having become incor- 
porated into the general mass of the company's property." This ground of the decision 
was subsequently discountenanced in Philadelphia & Southern Mail S. S. Co. v. 
Pennsylvania, note 5, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 577 

chises granted by it in any way that it pleases. Mr. Justice Miller 
dissented. With him concurred Justices Field and Hunt. The 
dissenting opinion lays emphasis on the fact that the imposition 
of the tax is in reality on transportation, and that it must be paid 
out of the receipts thereof, 19 and must therefore increase the price 
of such transportation. No attention was paid specifically to the 
argument of the majority that the tax was justified, because of the 
power of the state to deny the privilege of incorporation. The 
reasoning, however, was sufficiently broad to cover the contention : 

"I lay down the broad proposition that by no device or evasion, by 
no form of statutory words, can a State compel citizens of other States 
to pay to it a tax, contribution, or toll, for the privilege of having their 
goods transported through that State by the ordinary channels of com- 
merce." 20 

In Delaware Railroad Tax, 21 decided the following year, the 
court, in unanimously sustaining a Delaware statute imposing a 
tax on a Delaware corporation, expressed the doctrine as follows: 

"As we construe the language of the fourth section, the tax is neither 
imposed upon the shares of the individual stockholders nor upon the 
property of the corporation, but is a tax upon the corporation itself, 
measured by a percentage upon the cash value of a certain proportional 
part of the shares of its capital stock; a rule which, though an arbitrary 
one, is approximately just, at any rate is one which the legislature of 
Delaware was at liberty to adopt. 

"The State may impose taxes upon the corporation as an entity exist- 
ing under its laws, as well as upon the capital stock of the corporation 
or its separate corporate property. And the manner in which its value 
shall be assessed and the rate of taxation, however arbitrary or capricious, 
are mere matters of legislative discretion. It is not for us to suggest in 
any case that a more equitable mode of assessment or rate of taxation 
might be adopted than the one prescribed by the legislature of the State; 
our only concern is with the validity of the tax; all else lies beyond the 
domain of our jurisdiction." 22 

19 Mr. Justice Miller asks whether the tax is " within the evil intended to be remedied 
by the commerce clause of the Constitution" and answers: "It seems to me that to 
hold that the tax on freight is within it, and that on gross receipts arising from such 
transportation is not, is 'to keep the word of promise to the ear and break it to the 
hope.'" 15 Wall. 284, 298 (1873). 

20 15 Wall. 284, 299 (1873). 

21 18 Wall. (85 U. S.) 206 (1874),. 

22 18 Wall. 206, 231 (1874). 



578 HARVARD LAW REVIEW 

In Railroad Co. v. Maryland 23 the court sustained a stipulation 
in the charter of a corporation created by the state of Maryland 
that the corporation should pay to the state in January and July, 
in each and every year, one-fifth of the whole amount which may 
be received for the transportation of passengers on said railroad 
by said company during six months last preceding. Since the 
corporation was engaged in transportation between Baltimore 
and Washington, the receipts which were made the measure of the 
annual payment were in large part receipts from interstate com- 
merce. In the opinion of Mr. Justice Bradley, it was stated that 
it would have been possible for the state to construct a railroad 
between Baltimore and Washington, and exact such compensation 
for transportation on such road as it chose. 

"As before said, the State could have built the road itself and charged 
any rate it chose, and could thus have filled the coffers of its treasury 
without being questioned therefor. How does the case differ, in a 
constitutional point of view, when it authorizes its private citizens to 
build the road and reserves for its own use a portion of the earnings? 
We are unable to see any distinction between the two cases. In our 
judgment there is no solid distinction. If the State, as a consideration 
of the franchise, had stipulated that it should have all the passenger- 
money, and that the corporation should have only the freight for the 
transportation of merchandise, and the corporation had agreed to 
those terms, it would have been the same thing. It is simply the 
exercise by the State of absolute control over its own property and 
prerogatives." u 

The fact that this exaction by the state would affect interstate 
transportation was said to be not material, and it was pointed 
out that the same result follows from every burden or tax imposed 
on corporations engaged in interstate commerce. 

"The State is conceded to possess the power to tax its corporations; 
and yet every tax imposed on a carrier corporation affects more or less 
the charges it is compelled to make upon its customers. So, the State 
has an undoubted power to exact a bonus for the grant of a franchise, 
payable in advance or infuturo; and yet that bonus will necessarily affect 
the charge upon the public which the donee of the franchise will be obliged 
to impose. The stipulated payment in this case, indeed, is nothing more 

23 21 Wall. (88 U. S.) 456 (1875). 

24 21 Wall. 456, 472 (1875). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 579 

nor less than a bonus; and so long as the rates of transportation are 
entirely discretionary with the States, such a stipulation is clearly within 
their reserved powers." 25 

No authorities were cited for the decision of the court. The brief 
dissenting opinion of Mr. Justice Miller was as follows: 

"I am of opinion that the statute of Maryland requiring the railroad 
company to pay into the treasury of the State one-fifth of the amount 
received by it from passengers on the branch of the road between Balti- 
more and Washington, confined as it is exclusively to passengers on that 
branch of the road, was intended to raise a revenue for the State from 
all persons coming to Washington by rail, and had that effect for twenty- 
five years, and that the statute is, therefore, void within the principle 
laid down by this court in Crandall v. Nevada." 26 

The foregoing cases involved taxation on domestic corporations. 
The absolute power of the state was founded on the fact that it 
might have declined to create the corporation. The franchise 
that could be denied could be taxed as the state pleases. In Maine 
v. Grand Trunk Railway Co. 27 the same doctrine was applied to a 
foreign corporation which had leased the rights and privileges of a 
domestic corporation. The statute under which the tax was levied 
imposed on every corporation, person, or association operating 
a railroad in the state "an annual excise tax for the privilege of 
exercising its franchises." The majority held that the tax was 
levied on a privilege entirely within the discretion of the state to 
grant or withhold, and that the "character of the tax, or its validity, 
is not determined by the mode adopted in fixing its amount." 28 
The amount of the tax in question was determined by applying 
the statutory rate to a sum ascertained by multiplying the average 
receipts per mile over the whole system of the road by the number 
of miles in the state. This measure clearly included receipts from 
interstate, as well as from intra-state, commerce. The minority, 
consisting of Justices Bradley, Harlan, Lamar, and Brown, main- 
tained that the tax, though called one on a franchise, was, in fact, 
one on the receipts of the company derived from international 
transportation. The precedents on which they relied involved taxes 

25 21 Wall. 456, 473 (1875). 

26 21 Wall. 456, 475 (1875). 

27 142 U. S. 217, 12, Sup. Ct. Rep. 121 (1891). 

28 142 U. S. 217, 228, 12 Sup. Ct. Rep. 121 (1891). 



580 HARVARD LAW REVIEW 

imposed, not on some privilege within the grant of the state, but 
on receipts from interstate commerce, 29 or on engaging in a specified 
business which was in part interstate commerce. 30 In these cases 
the subject on which the tax was levied was held to be beyond the 
power of the state. The majority, on the other hand, rested the 
decision on the authority of Home Ins. Co. v. New York, 31 sus- 
taining a tax on the franchise of a domestic corporation. They 
must therefore have regarded the tax as imposed on the privilege 
of a foreign corporation either to succeed to the rights of a domestic 
corporation, or to be admitted to the state to carry on intra-state 
commerce, for these were the only privileges which the state might 
have withheld. The language of the statute is sufficiently broad 
to bring the case within the authority of the precedents relied on 
by the minority. But the difference of opinion on this point does 
not affect the authority of the case for the proposition that the 
validity of the tax depends on the subject on which it is levied, and 
not on the measure by which its amount is determined. "There 
is," said Mr. Justice Field for the majority, "no levy by the statute 
on the receipts themselves, either in form or fact; they constitute, 
as said above, simply the means of ascertaining the value of the 
privilege conferred." 32 

In Ashley v. Ryan 33 the court sustained unanimously a statute 
of Ohio which required a fee for filing with the secretary of the 
state, articles of agreements of consolidation of different corpora- 
tions. The amount of the fee was fixed by a small percentage of 
the total capital stock, and it was alleged that this requirement 
was a regulation of interstate commerce. In view of subsequent 
decisions, the opinion of Mr. Justice White is of more than usual 
importance. He presents the theory underlying the decision as 
follows: 

29 Philadelphia & Southern Mail S. S. Co. v. Pennsylvania, note 5, supra. 

30 Crutcher v. Kentucky, note 5, supra; Leloup v. Port of Mobile, note 5, supra; 
Pickard v. Pullman Southern Car Co., 117 U. S. 34, 6 Sup. Ct. Rep. 635 (1886); Norfolk 
& W. R. Co. v. Pennsylvania, 136 U. S. 114, 10 Sup. Ct. Rep. 958 (1890). 

31 134 U. S. 594, 10 Sup. Ct. Rep. 593 (1889). Though the tax was measured by 
the capital stock, part of which was invested in United States bonds, it was held not 
to be an unconstitutional interference with the federal borrowing paper. See pages 
334-35, supra. 

32 142 U. S. 217, 229, 12 Sup. Ct. Rep. 121 (1891). For a re-interpretation of the 
Maine Case, see Galveston, H. & S. A. R. Co. v. Texas, note 41, infra. 

33 153 U. S. 436, 14 Sup. Ct. Rep. 865 (1894). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 581 

"The purpose of the tender of the articles of consolidation to the 
Secretary of State was to secure to the consolidated company certain 
powers, immunities, and privileges which appertain to a corporation 
under the laws of Ohio. The rights thus sought could only be acquired 
by the grant of the State of Ohio, and depended for their existence upon 
the provisions of its laws. Without that State's consent they could not 
have been procured. . . . 

"Hence, in seeking to file its articles of incorporation, the company 
was applying for privileges, immunities, and powers which it could by 
no means possess, save by the grace and favor of the constitution of the 
State of Ohio and the statutory provisions passed in accordance there- 
with. At the time the articles were presented for filing, the statute law 
of the State charged the parties with notice that the benefits which it 
was sought to procure could not be obtained without payment of the sum 
which the Secretary of State exacted. As it was within the discretion of 
the State to withhold or grant the privilege of exercising corporate ex- 
istence, it was, as a necessary resultant, also within its power to impose 
whatever conditions it might deem fit as prerequisite to corporate life. 
The act of filing, constituting, as it did, a claim of a right to the franchise 
granted by the state law, carried with it a voluntary assumption of any 
burden with which the privilege was accompanied, and without which 
the right of corporate existence could not have been procured. We say 
voluntary assumption, because, as the claim of the franchise was volun- 
tary, the assumption of the privilege which resulted from it partook neces- 
sarily of the nature of the claim for corporate existence. Having thus 
accepted the act of grace of the State and taken the advantages which 
sprang from it, the company cannot be permitted to hold on to the 
privilege or right granted, and at the same time repudiate the condition 
by the performance of which it could alone obtain the privilege which it 
sought. . . . 

"It follows from these principles that a State, in granting a corporate 
privilege to its own citizens, or, what is equivalent thereto, in permitting 
a foreign corporation to become one of the constituent elements of a 
consolidated corporation organized under its laws, may impose such 
conditions as it deems proper, and that the acceptance of the franchise 
in either case implies a submission to the conditions without which the 
franchise could not have been obtained." 34 

Ten years later, in two unanimous decisions, the Supreme Court 
sustained taxes on the local business of foreign corporations and 
dismissed as immaterial the contentions that, because the taxes 

84 153 U. S. 436, 440-43, 14 Sup. Ct. Rep. 865 (1894). 



582 HARVARD LAW REVIEW 

imposed economic burdens on interstate commerce, they were 
therefore invalid regulations of such commerce. Pullman Co. v. 
Adams 35 involved a tax on sleeping-car companies carrying pas- 
sengers from one point to another within the state. The tax was 
$100, plus twenty-five cents per mile for each mile of railroad 
track over which the company runs. The company offered to 
show that the receipts from intra-state passengers did not equal 
the expenses chargeable against such receipts. On the assumption 
that the company was legally free to abandon its intra-state 
business, 36 the court held that it was not important that there 
were no profits on that business, and that the tax would have to be 
paid from interstate receipts, saying: "The company cannot com- 
plain of being taxed for the privilege of doing local business which 
it is free to renounce. Both parties agree that the tax is a privilege 
tax." 37 

Pullman Co. v. Adams was quoted with approval in Allen v. 
Pullman's Palace Car Co., 3s which sustained a tax of $3,000 on 
sleeping-car companies for one or more passengers taken up at 
one point in the state and delivered at another point within the 
state. But, in rejecting the contention that, since the intra-state 
business was such a small part of the total business, the statute 
was but a thinly disguised attempt to tax the privilege of interstate 
traffic, Mr. Justice Day remarked: 

"If the payment of this tax was compulsory upon the company before 
it could do a carrying business within the state, and the burden of its 
payment, because of the minor character of the domestic traffic, rested 
mainly upon the receipts from interstate traffic, there would be much 
force in this objection." 39 

This reference to the possible significance of the economic burden 
on interstate commerce must be taken as merely a qualification of 
the implication that the state cannot require payment of a tax 
on intra-state commerce as a condition of continuing to engage 
in interstate commerce; for the passage in the opinion immediately 
following that quoted above reads as follows : 

35 189 U. S. 420, 23 Sup. Ct. Rep. 494 (1903). 

36 This assumption was based on the interpretation of the state constitution given 
by the state court. 

37 189 U. S. 420, 422, 23 Sup. Ct. Rep. 494 (1903). 

38 191 U. S. 171, 24 Sup. Ct. Rep. 39 (1903). 

39 191 U. S. 171, 181, 24 Sup. Ct. Rep. 39 (1903). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 583 

"Upon this proposition we are unable to distinguish this case from 
Pullman Co. v. Adams, 189 U. S. 420, 47 L. Ed. 877, 23 Sup. Ct. Rep. 
494, decided at the last term, wherein it was held that the privilege tax 
imposed by the state of Mississippi, upon each car carrying passengers 
from one point in the state to another therein, was a valid tax, notwith- 
standing the fact that the company offered to show that its receipts 
from the carrying of the passengers named did not equal the expenses 
chargeable against such receipts. This conclusion was based upon the 
right of the company to abandon the business if it saw fit." 40 

It is obvious from these two decisions that the court was still 
interested exclusively in the legal res which was the subject of the 
tax. The next case to be considered is Galveston, H. & S. A. R. 
Co. v. Texas, 41 decided five years later. The tax there in issue 
was imposed on railroad corporations and other persons owning 
or controlling any line of railroad wholly within the state. Neither 
the majority nor the minority treated the tax as on a privilege 
within the power of the state to withhold. The minority deemed 
it an occupation tax and valid, in spite of the fact that the measure 
of the tax included receipts from interstate commerce. The 
majority held that the tax was imposed directly on the receipts, 
and was therefore invalid. Both majority and minority were 
looking merely at the subject on which the tax was laid, although 
Mr. Justice Holmes for the majority declared that, "neither the 
state courts nor the legislatures, by giving a tax a particular name 
or by the use of some form of words, can take away our duty to 
consider its nature and effect." 42 Fuller consideration of the case 
will be given in a later section dealing with taxes on occupations. 
Attention is called to it at this point for the bearing which the 
division of opinion among the judges has on the next case to be 
considered. In the Galveston Case the majority was composed 
of Mr. Justice Holmes, who wrote the opinion, and Justices Brewer, 
Peckham, Day, and Moody. The dissenting judges were Mr. 
Justice Harlan, who wrote the opinion, and Chief Justice Fuller, 
and Justices White and McKenna. 

40 191 U. S. 171, 181-82, 24 Sup. Ct. Rep. 39 (1903). 

41 210 TJ. S. 217, 28 Sup. Ct. Rep. 638 (1908). 

42 210 U. S. 217, 227, 28 Sup. Ct. Rep. 638 (1908). 



584 HARVARD LAW REVIEW 

(b) The Modification of the Doctrine of Unlimited Power 

Thus far, as we have seen, the doctrine that a state may tax as 
it pleases any privilege that it may withhold has always had the 
assent of a majority of the Supreme Court. But in 1910 came two 
decisions which seem to mark a new departure. The majority 
seems to have become a minority. This conclusion, however, 
cannot be stated with certainty, since in both these cases, Western 
Union Telegraph Co. v. Kansas 43 and Pullman Co. v. Kansas, u 
the majority of the court did not fully agree in the reasons for 
their decision. Mr. Justice Harlan wrote the opinion of the court 
in both cases. With him concurred Justices Brewer and Day. Mr. 
Justice White riled separate concurring opinions. Both Mr. Justice 
Moody and Mr. Justice Peckham were absent from the bench on 
account of illness when the cases were decided. But it was an- 
nounced that the former approved of Mr. Justice Harlan's opinion 
in the Western Union Case, and that the latter agreed with the 
minority. Mr. Justice Holmes wrote dissenting opinions in the 
two cases, in which opinions Chief Justice Fuller concurred. Mr. 
Justice McKenna concurred in the dissenting opinion in the Kansas 
Case, and his dissent in the Pullman Case was separately recorded. 

The tax involved in the two cases was measured by applying 
scheduled rates to the total capital stock. So far as the wording of 
the statute indicates, it was imposed on all corporations, domestic 
and foreign, exercising their corporate powers within the state. 
But, as the case came before the court, both the majority and 
minority treated the question as one involving the propriety of the 
exaction on foreign corporations as a condition of doing local busi- 
ness within the state. Kansas had obtained decrees in her own 
supreme court, ousting and restraining the corporations from doing 
any business that was wholly internal to the state and not pursuant 
to some arrangement with the federal government. The basis for 
the decree was the non-payment of the tax. The question before 
the Supreme Court was whether ouster from all purely local business 
in default of such payment was a regulation of interstate commerce. 

The precise issue which the court had to meet will be made 
clearer by quotations from the dissenting opinions of Mr. Justice 

43 216 U. S. 1, 30 Sup. Ct. Rep. 190 (1910). 

44 216 U. S. 56, 30 Sup. Ct. Rep. 232 (1910). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 585 

Holmes. In the Western Union Case he says: "I confess my 
inability to understand how a condition can be unconstitutional 
when attached to a matter over which the state has absolute 
arbitrary power." 45 He points out that Kansas has not attempted 
to impose an absolute liability, but has merely said that if the 
company wishes to do local business it must pay a certain sum. 

"It does not matter if the sum is extravagant. Even in the law the 
whole generally includes its parts. If the state may prohibit, it may 
prohibit with the privilege of avoiding the prohibition in a certain way. 
... I quite agree that we must look through form to substance. The 
whole matter is left in the Western Union's hands. If the license fee is 
more than the local business will bear, it can stop that business and avoid 
the fee. ... If the imposition were absolute, or if the attempt were 
to oust the corporation from the state if it did not pay, the arguments 
that prevail would be apposite. But the state seeks only to oust the 
corporation from that part of its business that the corporation has no 
right to do unless the state gives leave." 46 

Mr. Justice Holmes recognizes that "the local and interstate 
business may be necessary each to the other to make the whole 
pay." 47 But this he dismisses as immaterial, on the ground that 
"to deny the right of Kansas to do as it chooses with the local 
business is to require the local business to help sustain that between 
the states." 48 This point he reinforces in the Pullman Case: 49 

"I am quite unable to believe that an otherwise lawful exclusion from 
doing business within a state becomes an unlawful or unconstitutional 
burden on commerce among states because, if it were let in, it would 
help to pay the bills. Such an exclusion is not a burden on the foreign 
commerce at all; it simply is the denial of a collateral benefit. If foreign 
commerce does not pay its way by itself, I see no right to demand an 
entrance for domestic business to help it out." 

In concluding his opinion the learned justice goes back to the dicta 
of Chief Justice Marshall for support: 

"That the local business of telegraph and railroad companies may be 
taxed by the states has been held over and over again, with full accept- 

45 216 U. S. 1, 54, 30 Sup. Ct. Rep. 190 (1910). 

46 216 U. S. 1, 53, 30 Sup. Ct. Rep. 190 (1910). 

47 Ibid. 

48 216 U. S. 1, 54, 3& Sup. Ct. Rep. 190 (1910). 

49 216 U. S. 56, 76, 30 Sup. Ct. Rep. 232 (1910). 



586 HARVARD LAW REVIEW 

ance of the doctrine that quoad hoc, ' the power to tax involves the power 
to destroy' (M'Culloch v. Maryland, 4 Wheat. 316, 431, 4 Law Ed. 
579, 697), — essentially the doctrine on which the power of the states 
to tax interstate commerce was denied. . . . 

"I do not see how the reasoning that denies the power of the 
State to tax one kind of commerce (interstate) and asserts it with regard 
to the other (intra-state) can be reconciled with the denial of the 
power of the state to exclude the latter altogether, or to tax it for 
whatever sum it likes. The right to tax 'in its nature acknowledges 
no limits."' 50 

There can be no doubt that Mr. Justice Holmes is correctly 
applying the reasoning of many of his predecessors. If such reason- 
ing was essential to the decisions, he seems on firm ground when he 
says that he thinks "the tax in question . . . was lawful under 
all the decisions of this court until last week." 51 The majority 
can escape from the force of Mr. Justice Holmes's appeal to author- 
ity only by breaking entirely new paths, or by showing that the 
precise question before them differs from those involved in the 
earlier decisions. Both of these methods are adopted. 

Mr. Justice White in his concurring opinion in the Western 
Union Case makes no reference to any of the precedents. He lays 
emphasis upon the fact that the Western Union Company has been 
doing both local and interstate business in Kansas for a long time; 
that it came in as the result of the implied invitation or tacit con- 
sent of the state ; that it had expended large sums of money in the 
state, and that its investment was still there; that the continued 
beneficial existence of the investment depended upon the right to 
use the property for the purpose for which it was acquired, i. e., 
for both interstate and local business. These facts he brings to 
bear upon the contention of the state that the tax is not a burden 
on interstate commerce, because the company may avoid the tax 
by abandoning its local business. The abandonment of the local 
business, he says, would result in rendering worthless and, in effect, 
confiscating the property established for the purpose of doing 
such local business. He held, therefore, that this was no case for 
the doctrine of election or voluntary assumption of an uncon- 
stitutional burden. 

60 216 U. S. 56, 76, 77, 30 Sup. Ct. Rep. 232 (1910). 

61 216 U. S. 56, 77, 30 Sup. Ct. Rep. 232 (1910). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 587 

"The investment is there, and its magnitude, it is fair to assume, is, 
in part, a resultant of the requirements of the local business. The con- 
tinued beneficial existence of the investment depends upon the right to 
use the property for the purpose for which it was acquired, that is, for 
both interstate and local business. The state law takes the property, or 
what is equivalent thereto, imposes an unconstitutional and confiscatory 
burden, upon the condition that such burden be discharged or the local 
business be abandoned. What possible election can there be? The 
property is in the State. It has been invested therein for the very pur- 
pose of doing local as well as other business. If the unconstitutional 
burden be not assumed, local business must cease, and hence the property 
established for the purpose of doing the local business becomes worthless 
and is in effect confiscated. If, on the other hand, the unconstitutional 
burden be borne, a like result takes place. . . . The view taken by me 
does not deprive the State of power to exert its authority over the 
corporation and its property in the amplest way subject to constitutional 
limitations. It simply prevents the State from driving out the corpora- 
tion which is in the State by imposing upon it arbitrary and uncon- 
stitutional conditions, when upon no possible theory could the right 
to exact them exist, except upon the assumption that the corporation 
is not in the State, and that the illegal exactions are the price of the 
privilege of allowing it to come in." 52 

This position of Mr. Justice White seems to be based on the 
due-process clause rather than on the commerce clause. Mr. 
Justice Holmes meets it as follows: 

"Finally, in the absence of contract, the power of the state is not 
affected by the fact that the corporation concerned already is in the state, 
or even has been there for some time. . . . Whatever the corporation 
may do or acquire there is infected with the original dependence upon 
the will of the state. . . . But furthermore, it is a short answer to this 
part of the argument that, in the present case, according to the decisions 
relied upon by the majority, the state could not have prevented the 
entry of the corporation, because it entered for the purpose of commerce 
with other states." 53 

The debate between Mr. Justice White and Mr. Justice Holmes 
is continued in their opinions in the Pullman Case. The former 
concedes the general principle relied on by his colleague. Wherever 

62 216 U. S. 1, 50-51^30 Sup. Ct. Rep. 190 (1910). 
M 216 U. S. 1, 55-56, 30 Sup. Ct. Rep. 190 (1910). 



588 HARVARD LAW REVIEW 

the state has the absolute power to exclude, he says, it may impose 
such conditions as it pleases on the right to come in. If "a foreign 
corporation avails of such a right, it may not assail the constitu- 
tionality of the condition because, by accepting the privilege, it 
has voluntarily consented to be bound by the conditions." 54 In 
such a case, "the absolute power of the state is the determining 
factor, and the validity of the condition is immaterial." 55 But 
this principle is said to have no application to a foreign corporation 
engaged in interstate commerce, for its right to come into the state 
to engage in such commerce is independent of the will of the state. 
"The power to exclude in such a case being only relative, affords 
no warrant for the exertion by the state of an absolute prohibi- 
tion." 56 The learned justice goes so far as to say that "where the 
right to do an interstate business exists, without regard to the 
assent of the state, a state law which arbitrarily forbids a corpora- 
tion from carrying on with its interstate business a local business 
would be a direct burden upon interstate commerce," 57 and in 
conflict with the principle that "a state may not exert its con- 
cededly lawful powers in such a manner as to impose a direct burden 
on interstate commerce." 58 

As to this last point, Mr. Justice Holmes replies that it seems to 
him "a proposition not to be assumed, but to be proved." 59 And 
he rejects it. And with respect to his colleague's distinction be- 
tween absolute and relative powers of exclusion, he observes : 

"I do not see how or why the right of a state to exclude a corporation 
from internal traffic is complicated or affected in any way by the fact 
that the corporation has a right to come in for another purpose. It is 
said that in such a case the power of the state is only relative, and in 
the sense that it is confined to the local business, I agree. But, in the 
sense that it is not absolute over that local business, the statement seems 
to me merely to beg the question that is discussed. I do not see why the 
power is less absolute over that because it does not extend to something 
else." 60 

64 216 U. S. 56, 66, 30 Sup. Ct. Rep. 232 (1910). 

65 Ibid. 

66 216 U. S. 56, 68, 30 Sup. Ct. Rep. 232 (1910). 

67 Ibid. 

68 216 U. S. 56, 65, 30 Sup. Ct. Rep. 232 (1910). 

69 216 U. S. 56, 76, 30 Sup. Ct. Rep. 232 (1910). 
80 216 U. S. 56, 77, 30 Sup. Ct. Rep. 232 (1910). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 589 

Here, again, Mr. Justice Holmes follows faithfully the footsteps of 
his forerunners. Mr. Justice White is opening new paths. He 
says, in effect, that the right of the state to exclude a foreign cor- 
poration from doing local business in connection with interstate 
business ought not to be recognized, because the inability to carry 
on local business in connection with the interstate business imposes 
a direct burden on interstate commerce. The extent to which this 
is true will of course depend on the kind of business in question. 
It will appear that in the Western Union Case and in the decisions 
which have followed it, the determination of the question whether 
the tax is a regulation of interstate commerce is dependent on the 
nature of the business in question, 61 as well as on the measure by 
which the amount of the tax is determined. 

Mr. Justice Harlan's opinion for the court in the Western Union 
Case took a somewhat broader ground than that chosen by Mr. 
Justice White. It stands for the more general proposition that, 
wherever the abandonment of local business would appreciably 
increase the cost of conducting the interstate business, the state 
cannot measure a tax on the local business by a method which re- 
sults in imposing a substantial burden on the interstate business. 
In reply to the claim that the state had no intention to embarrass 
interstate commerce, but only to prevent the company from doing 
local business without complying with the statute, it was said: 

" But the disavowal by the State of any purpose to burden interstate 
commerce cannot conclude the question as to the fact of such a burden 
being imposed, or as to the unconstitutionality of the statute as shown by 
its necessary operation upon interstate commerce. If the statute, reason- 
ably interpreted, either directly or by its necessary operation, burdens 
interstate commerce, it must be adjudged to be invalid, whatever may 
have been the purpose for which it was enacted, and although the com- 
pany may do both interstate and local business. This court has repeat- 
edly adjudged that in all such matters the judiciary will not regard mere 
forms, but will look through forms to the substance of things. . . , 62 

"The right of the Telegraph Company to continue the transaction 
of local business in Kansas could not be made to depend upon its sub- 
mission to a condition prescribed by that State, which was hostile both 
to. the letter and spirit of the Constitution. The company was not 

61 This was in type before the author had received the advance sheets containing 
the opinion in Looney v. Crane Co., note 114, infra. See pages 600-618, infra. 

62 216 U. S. 1, 27, 30 Sup. Ct. Rep. 190 (iqio). 



590 HARVARD LAW REVIEW 

bound, under any circumstances, to surrender its constitutional ex- 
emption from state taxation, direct or indirect, in respect of its interstate 
business and its property outside of the State, any more than it would 
have been bound to surrender any other right secured by the National 
Constitution." 63 

The opinion thus stands for the doctrine, that when the measure 
adopted for determining the amount of a tax on the privilege of 
doing local business is such as in reality to impose a burden on 
interstate commerce, that measure cannot be constitutionally 
applied. The power to burden interstate commerce does not 
exist merely because of the general power of the state to exclude 
a corporation from doing local business. 

In every case, then, the question at issue is whether a tax imposed 
by the state really burdens interstate commerce. Whether it does 
so will depend not only upon the measure by which the amount of 
the tax is determined, but also upon the character of the business 
to which the tax is applied. 64 In Pullman Co. v. Adams 65 the deci- 
sion was based on the assumption that the company was legally 
free to abandon its local business. The court stated that, if such 
were not the case, the tax would be invalid. No consideration was 
given to the fact that the abandonment of local business might 
result in such economic loss to the interstate business, that the legal 
freedom to abandon the local business would not be exercised, even 
though the tax on the local business exceeded the net income from 
that business. In Western Union Telegraph Co. v. Kansas, 66 how- 
ever, the court looked at the contention that the corporation might 
escape the tax by abandoning its local business, not from the 
standpoint of the legal possibility of such abandonment, but from 
the standpoint of its economic effect. If the company could not 
abandon its local business without economic loss to its interstate 
business, the state cannot impose a tax on the local business which 
is in reality a burden on the interstate business. In the language 
of Mr. Justice Harlan: 

"We cannot fail to recognize the intimate connection which, at this 
day, exists between the interstate business done by interstate companies 
and the local business which, for the convenience of the people, must be 

63 216 U. S. 1, 47-48, 30 Sup. Ct. Rep. 190 (1910). 

64 See note 61 , supra. 

65 Note 35, supra. K Note 43, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 591 

done or can generally be better and more economically done by such 
interstate companies rather than by domestic companies organized to 
conduct only local business. 67 

"The state knows that the Telegraph Company, in order to accommo- 
date the general public and make its telegraphic system effective, must 
do all kinds of telegraphic business. Yet, it seeks to enforce a regulation 
requiring the company by paying the 'fee' in question to assent to its 
interstate business being burdened and its property outside of Kansas 
being taxed in order that it may continue to conduct a business conced- 
edly beneficial to the public — a right lawfully acquired from the United 
States when Kansas was a Territory, and exercised, consistently with 
the statutes of the State for many years after Kansas was admitted as 
a State of the Union. . . , 68 

"It is easy to be seen that if every State should pass a statute similar 
to that enacted by Kansas not only the freedom of interstate commerce 
would be destroyed, the decisions of this court nullified and the business 
of the country thrown into confusion, but each State would continue 
to meet its own local expenses, not only by exactions that directly bur- 
dened such commerce but by taxation upon property situated beyond 
its limits." 69 

Owing to the difference between the opinion of Mr. Justice 
Harlan and that of Mr. Justice White, it is difficult to state the 
proposition for which the Western Union Case and the Pullman 
Case stand. Mr. Justice White's opinion in the Pullman Case 
would seem to indicate that he would permit Kansas to impose 
such taxes as it pleases on domestic corporate franchises. Yet he 
said in the Western Union Case that he did "not wish to be under- 
stood as dissenting in any respect from the fundamental principle 
which the opinion of the court embodies and applies." 70 Yet the 
fundamental principle of that opinion is directly opposed to the 
fundamental principle of Mr. Justice White's opinion in Ashley 
v. Ryan. 71 But the learned justice tells us that the doctrine of 

67 216 U. S. 1, 37, 30 Sup. Ct. Rep. 190 (1910). 

68 216 U. S. 1, 33, 30 Sup. Ct. Rep. 190 (1910). 

69 216 U. S. 1, 37, 30 Sup. Ct. Rep. 190 (1910). 

70 216 U. S. 1, 52, 30 Sup. Ct. Rep. 190 (1910). 

71 Note ^^, supra. In a dictum in his opinion in the Western Union Case Mr. 
Justice Harlan makes it evident that he would apply the doctrine of the decision to 
domestic corporations engaged in other kinds of interstate commerce than trans- 
portation. At 216 U. S. 1, 36-37, 30 Sup. Ct. Rep. 190 (1910), he says: 

"If a domestic corporation engaged in the business of soliciting orders for goods 
manufactured, sold, and delivered in a State, should in addition solicit orders for goods 



592 



HARVARD LAW REVIEW 



some of the earlier cases in which he concurred did not represent his 
individual convictions. 

"When first after the duty came to me of taking part in the work of 
the court the question arose of the right of a State in cases where it had 
absolute authority to impose an unconstitutional condition as a prerequi- 
site to the right to do local business, my individual convictions were 
suppressed and my opinion yielded because of the conception that it 
was my duty to enforce in such a case the previous rulings of the court, 
however much as an original question I would have held a contrary view. 
But because my convictions were thus yielded in such a case affords no 
reason why I now should assent to extending the doctrine of the previous 
cases to conditions to which, in my opinion, they do not apply." 72 

Mr. Justice Harlan does not recognize that his opinion is in any 
way inconsistent with previous decisions. He prefaces his analysis 
of the situation involved in the case at bar with an extended review 
of earlier decisions. But these were cases in which the court held 
that the tax was imposed on a subject itself interstate commerce. 73 
He dismisses the contention that earlier cases had established that 
a state may impose on foreign corporations such terms as it pleases, 
by pointing out that "those were cases in which the particular 
foreign corporation before the court was engaged in ordinary 
business, and not directly or regularly in interstate or foreign 
commerce." 74 Pullman Co. v. Adams 75 he explains by saying 
that the tax there involved was not at all disproportioned to the 

manufactured in and to be brought from another State for delivery, could the former 
State make it a condition of the right to engage in local business within its limits that 
the corporation pay a given percentage of all fees or commissions received by it in 
its business, interstate and domestic? There can be but one answer to this question, 
namely, that such a condition would operate as a direct burden on interstate com- 
merce, and therefore would be unconstitutional and void. Consistently with the 
Constitution, no court could, by any form of decree, recognize or give effect to or 
enforce such a condition." 

This dictum is directly contrary to Ficklen v. Shelby County Taxing District, 145 
U. S. 1, 12 Sup. Ct. Rep. 810 (1892). In that case, however, Mr. Justice Harlan dis- 
sented. 

72 216 U. S. 56, 74, 30 Sup. Ct. Rep. 232 (1910). 

73 McCall v. California, note 5, supra; Crutcher v. Kentucky, note 5, supra; Glouces- 
ter Ferry Co. v. Pennsylvania, note 5, supra; Leloup v. Port of Mobile, note 5, supra; 
Galveston, H. & S. A. R. Co. v. Texas, note 41, supra; Henderson v. New York, 92 
U. S. 950 (1875); Brimmer 0. Rebman, 138 U. S. 78, n Sup. Ct. Rep. 213 (1891). 

74 216 U. S. 1, 33, 30 Sup. Ct. Rep. 190 (1910). 

75 Note 35, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 593 

local business, and was, therefore, "not to be regarded as a mere 
device to reach or burden the interstate commerce of the com- 
pany." Allen v. Pullman's Palace Car Co. n he dismisses by quoting 
from the opinion to the effect, that the statute sustained "applied 
' strictly to business done (by sleeping-car companies) in the 
transportation of passengers taken up at one point in the state 
and transported wholly within the state to another point therein.' " 77 
But what the opinion in that case said of the statute was that 
"its terms apply strictly," etc. 78 Clearly both the Adams Case 
and the Allen Case were decided on the theory that any economic 
burden imposed by the taxes on interstate commerce was immaterial, 
so long as the company was free to abandon the local business. 
Very likely the taxes might have been sustained on the theory 
that the burden on interstate commerce was not sufficiently serious 
to be controlling. But this was not the theory adopted and applied. 
Though the Western Union Case and the Pullman Case may not 
require any overruling of earlier decisions, they plainly mark the 
abandonment of earlier doctrines. Notwithstanding the differences 
of opinion among the judges who constituted the majority of the 
court, the Western Union Case and the Pullman Case clearly 
decide that a tax on the right of a foreign corporation to do local 
business may by reason of its economic effect on interstate com- 
merce be a regulation of that commerce. With the establishment 
of this doctrine, the court is compelled to consider the economic 
effect on interstate commerce of every tax complained of. 79 But 
neither in the Western Union Case nor in the Pullman Case was 
it inquired whether the specific amount of the tax in question 
was disproportionate to the value of the privilege of doing local 
business. No reference was made to the amount of local business. 
The theory of the majority seemed to be that it was unconstitu- 
tional to apply the measure of total authorized capital, even though 
the rate applied to that amount was infinitesimal. The rates 
specified in the Kansas statute started at one-tenth of one per 
cent on the first $100,000 and diminished as the capital was larger. 
The Western Union Company was taxed $20,100 on an authorized 

76 Note 38, supra. 

77 216 U. S. 1, 44, 30 Sup. Ct. Rep. 190 (1910). 

78 191 U. S. 171, 180, 24 Sup. Ct. Rep. 39 (1903). 

79 See note 61 , supra. 



594 HARVARD LAW REVIEW 

capital of $100,000,000. Mr. Justice Holmes remarked in his 
dissenting opinion: 

"If, after this decision, the state of Kansas, without giving any 
reason, sees fit simply to prohibit the Western Union Telegraph Company 
from doing any more local business there, or from doing local business 
until it has paid $20,100 I shall be curious to see upon what ground 
that legislation will be assailed." 80 

In the Pullman Case the company was taxed $14,800 on an author- 
ized capital of $74,000,000. In Ludwig v. Western Union Telegraph 
Co., 81 decided at the same term, the company escaped from the 
payment of $25,050 on its authorized capital of $100,000,000. This 
case arose under an Arkansas statute which adopted the measure 
of the authorized capital stock. It would seem that, unless certain 
measures are to be deemed invalid whatever their economic effect 
on interstate commerce, 82 the court should in each case consider 
the rate as well as the measure, should ascertain the value of 
the local business, and should judge whether the sum actually 
charged for the privilege of conducting that business is moderate 
or excessive. 

Some of these elements were touched upon in Atchison, T. & S. 
F. R. Co. v. O'Connor, 83 which declared invalid a Colorado tax of 
two cents per $1,000 on the capital stock of a foreign corporation. 
The decision was unanimous, indicating that all the court accepted 
the doctrine of the Western Union Case as definitely established. 
Mr. Justice Holmes, who wrote the opinion, referred to the fact 
that the greater part of the property and business of the Kansas 
corporation seeking to escape from the Colorado tax "is outside 
the state of Colorado, and of the business done within the state 
but a small proportion is local, the greater part being commerce 
among the states." 84 

In Baltic Mining Co. v. Massachusetts, 8 ' decided in 1913, the 
nature of the business and the amount of the tax receive more 

80 216 U. S. 1, 54-55, 30 Sup. Ct. Rep. 190 (1910). 

81 216 U. S. 146, 30 Sup. Ct. Rep. 280 (1910). 

82 This appears to be the conclusion of the Supreme Court with reference to the 
measure of total capital stock, with no maximum limitation where applied to taxes on 
foreign corporation. See pages 600-618, infra. 

83 223 U. S. 280, 32 Sup. Ct. Rep. 216 (1912). 

84 223 U. S. 280, 285, 32 Sup. Ct. Rep. 216 (1912). 
86 231 U. S. 68, 34 Sup. Ct. Pep. 15 (1913). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 595 

specific consideration. In that case an excise tax measured by 
the total authorized capital, with a proviso that the annual im- 
position should not exceed $2,000, was held not to be a burden on 
interstate commerce when applied to the two corporations whose 
rights were there in question. One of these corporations was the 
Baltic Mining Company, which had no property in the state except 
current bank deposits and a certificate for $80,000 in the stock of 
another corporation. The other corporation, the S. S. White Dental 
Company, had in the state no real estate except a leasehold interest; 
it did no manufacturing in the state; its only property in the state 
consisted of about $100,000 in stock, fixtures, and bank deposits. 
In the case of each of these corporations, the authorized capital 
by which the tax was measured was only one-fifth, or thereabouts, 
of their entire assets. Mr. Justice Day, who wrote the opinion, 
stated that the court had no disposition to limit the authority of 
the Western Union Case or the Pullman Case, but added that 
"every case involving the validity of a tax must be decided on its 
own facts," 86 and that therefore "the facts upon which these 
cases were decided must not be lost sight of in deciding other and 
alleged similar cases." 87 He then proceeded to point out the 
differences between the Kansas and Massachusetts statutes 88 and 
between the business of the complainants and that of the objectors 
in the Kansas cases. 89 After considering these differences he said: 

86 231 U. S. 68, 85, 34 Sup. Ct. Rep. 15 (1913). 

87 Ibid. 

88 In addition to the difference due to the fixing of a $2,000 maximum in the Massa- 
chusetts statute, Mr. Justice Day refers to the fact that the authorized capital of the 
two corporations subjected to the Massachusetts tax is in each case about one-fifth of 
their total assets. 231 U. S. 68, 87, 34 Sup. Ct. Rep. 15 (1913). 

89 "In the Kansas cases the business of both complaining companies was com- 
merce, the same instrumentalities and the same agencies carrying on in the same 
places the business of the companies of state and interstate character. In the Western 
U. Tel. Co. Case, the company had a large amount of property permanently located 
within the state, and between 800 and 900 offices constantly carrying on both state 
and interstate business. The Pullman Company had been running a large number 
of cars within the state, in state and interstate business, for many years. There was 
no attempt to separate the intra-state business from the interstate business by the 
limitations' of state fines in its prosecution." 231 U. S. 68, 85-86, 34 Sup. Ct. Rep. 

IS (1913)- 

"In the cases at bar the business for which the companies are chartered is not, 
of itself, commerce. True it is that their products are sold and shipped in interstate 
commerce, and to that extent they are engaged in the business of carrying on inter- 
state commerce, and are entitled to the protection of the Federal Constitution against 



596 HARVARD LAW REVIEW 

"The conclusion, therefore, that the authorized capital is only used 
as the measure of the tax, in itself lawful, without the necessary effect 
of burdening interstate commerce, brings the legislation within the 
authority of the state. So, if the tax is, as we hold it to be, levied upon 
a legitimate subject of such taxation, it is not void because imposed 
upon property beyond the state's jurisdiction, for the property itself 
is not taxed. In so far as it is represented in the authorized capital 
stock, it is only used as a measure of taxation, and, as we have seen, 
such measure may be found in property or in the receipts from property 
not in themselves taxable." 90 

Thus it appears that a state may still measure taxes on lawful 
subjects by receipts or capital stock which it cannot tax directly. 
But of course a significant feature of the Massachusetts statute 
was the provision that the tax should in no event exceed $2,000. 
Chief Justice White, and Justices Van Devanter and Pitney, dis- 
sented from the decision, but without filing an opinion. 

After the decisions in Western Union Telegraph Co. v. Kansas 91 
and Ludwig v. Western Union Telegraph Co., 92 Kansas and Arkansas 
changed their statutes. The Kansas statute with respect to foreign 
corporations, as interpreted by the state court, referred, for the 
measure of the tax, only to that proportion of the total paid-up 
capital stock which was represented by property in Kansas em- 
ployed in purely local business. It also limited the annual im- 
position to $2,500. In Lusk v. Botkin, 93 a tax of this amount on a 
foreign railway company doing business in Kansas was sustained. 
The Arkansas statute was similar, except that there was no maxi- 
mum limit to the tax that might be charged. In St. Louis S. W. 
Ry. Co. v. Arkansas^ this statute was sustained and a tax of 

laws burdening commerce of that character. Interstate commerce of all kinds is 
within the protection of the Constitution of the United States, and it is not within 
the authority of a state to tax it by burdensome laws. From the statement of facts 
it is apparent, however, that each of the corporations in question is carrying on a 
purely local and domestic business, quite separate from its interstate transactions. 
That local and domestic business, for the privilege of doing which the state has imposed 
a tax, is real and substantial, and not so connected with interstate commerce as to 
render a tax upon it a burden upon the interstate business of the companies involved." 
231 U. S. 68, 86, 34 Sup. Ct. Rep. 15 (1913). 

90 231 U. S. 68, 87, 34 Sup. Ct. Rep. 15 (1013). 

91 Note 43, supra. 

92 Note 81, supra. 

93 240 U. S. 236, 36 Sup. Ct. Rep. 263 (1016). 

94 235 U. S. 350, 35 Sup. Ct. Rep. 99 (1914)- 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 597 

$6798.26 imposed on a foreign corporation whose property owned 
and used in the state for intra-state business was valued at $13,586,- 
520. These two cases would seem to indicate that the Massa- 
chusetts statute involved in the Baltic Case might also be applied 
to a foreign railroad company. The court might, however, draw 
a distinction between the cases and hold that, in spite of a provision 
for a maximum, a tax which refers for a measure to total capital 
stock cannot be applied to a corporation engaged in transportation, 
and using the same facilities for local and interstate business in 
such a manner that the abandonment of local business would not 
proportionately decrease operating costs. Whether, in such a case, 
the provision for a maximum would remove the difficulty inherent 
in selecting the total capital stock as a measure ought in common 
sense to depend on the maximum set. It would certainly be going 
far to say that a tax of $2,000 on the right of a foreign railroad 
corporation to do local business was invalid, merely because the 
total capital was taken as a basis for determining the exact amount 
of any levy of less than $2,000. 95 

On the same day that Lusk v. Botkin % was decided, the Supreme 
Court, in Kansas City, F. S. & M. R. Co. v. Botkin, 97 held applicable 
to a railroad corporation chartered in the state of Kansas a Kansas 
statute, imposing on the privilege of being a corporation a fee 
which was graduated according to the amount of paid-up capital 
stock, with a proviso that the maximum should be $2,500. Thus 
it appeared that, so far at least as domestic corporations are con- 
cerned, the selection of total capital stock as a measure is cured 
by a provision for a reasonable maximum, even though the cor- 
poration is engaged in transportation. The opinion left the reader 
in doubt as to the importance of the provision for a maximum. It 
seemed to assume that the doctrine of Western Union Telegraph 
Co. v. Kansas 98 applies to taxes on the franchises of domestic 
corporations. Its silence on this point might be taken to obliterate 
the distinction between taxes on domestic corporations and those 
on foreign corporations, which was relied on by Mr. Justice White 
to exclude the issue in Pullman Co. v. Kansas," from the prece- 

95 But see Albert Pick & Co. v. Jordan, 169 Cal. 1, 16-17, 20, 145 Pac. 506 (1915)' 

96 Note 93, supra. 

97 240 U. S. 227, 36 Sup. Ct. Rep. 261 (1916). 

98 Note 43, supra. » 

99 Note 44, supra. 



598 HARVARD LAW REVIEW 

dents in favor of the right of the state to tax domestic cor- 
porations as it pleases. The weakness of that distinction was 
convincingly demonstrated by Mr. Justice Holmes. But at the 
time it saved Mr. Justice White from direct repudiation of his 
opinion in Ashley v. Ryan. 100 

It was not necessary in Kansas City, F. S. & M. R. Co. v. Botkin m 
either to repudiate or affirm the broad doctrine, formerly prevail- 
ing, that the complete power of the state to refuse the privilege 
of incorporation necessarily sanctions any tax that the state might 
choose to levy on the enjoyment of the privileges granted, and the 
opinion of Mr. Justice Hughes is careful to do neither. It says only 
that a state tax on this privilege "is not necessarily invalid because 
it is measured by capital stock which in part may represent prop- 
erty not subject to the state's taxing power." 102 The learned 
justice, however, took pains to show that the reason for the de- 
cision was the special circumstances and characteristics of the 
special case: 

"In the present case, the tax is not laid upon transactions in interstate 
commerce, or upon receipts from interstate commerce either separately 
or intermingled with other receipts. It does not. fluctuate with the 
volume of interstate business. It is not a tax imposed for the privilege 
of doing an interstate business. It is a franchise tax — on the privilege 
granted by the state of being a corporation — and while it is graduated 
according to the amount of paid-up capital stock the maximum charge 
is $2,500 in the case of all corporations having a paid-up capital of 
$5,000,000 or more. This is the amount imposed in the present case 
where the corporation has a capital of $31,660,000. We find no ground 
for saying that a tax of this character, thus limited, is in any sense a 
tax imposed upon interstate commerce." 103 

Clearly, after this opinion, any state court would be in grave 
doubt as to the proper decision in a case involving a tax on the 
franchise of a domestic railroad corporation engaged in interstate 
commerce, if the tax was measured by total capital stock with no 
maximum limitation. The opinion of Mr. Justice Harlan in the 
Western Union Case proceeded on a theory which would be equally 

100 See pages 580-81, 591-92 supra. 

101 Note 97, supra. 

102 240 U. S. 227, 232, 30 Sup. Ct. Rep. 261 (1916). . 

103 240 U. S. 227, 235, 30 Sup. Ct. Rep. 261 (1916). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 599 

applicable to domestic corporations. A dictum declared plainly 
enough that a domestic corporation engaged in selling merchan- 
dise to purchasers in other states could not be subjected to a tax 
measured by its total receipts as a condition of doing local busi- 
ness. 104 But Mr. Justice White's opinion proceeded on grounds 
applicable only to foreign corporations, and without his con- 
currence, the majority would have been a minority. Yet Mr. 
Justice White also stated that he "did not dissent from the funda- 
mental application which the court made of the commerce clause 
of the Constitution." 105 His statement of the special grounds on 
which he concurred might have been regarded as prompted mainly 
by a desire not to be guilty of inconsistency with his previous 
position in Ashley v. Ryan. 106 The difficulty of knowing the precise 
extent of the new law which the Supreme Court made in the Western 
Union Case will be apparent when we come to consider the con- 
fusion engendered in some of the state courts during the transition 
period. 

So far, however, as the taxation of domestic corporations is 
concerned, the Supreme Court has largely cleared up the doubts 
raised by Kansas City, F. S. & M. R. Co. v. Botkin. 107 For in 
Kansas City, M. & B. R. Co. v. Stiles, 108 which is the latest 109 case 
on the subject, an annual excise measured by total capital stock 
was exacted from a domestic railroad corporation engaged in 
transportation between different states. This domestic corporation 
was created by a consolidation of other corporations under the 
very statute which imposed the annual excise. As Mr. Justice 
Day says in the opinion: 

"The railroads comprising this consolidation entered upon it with 
the Alabama statute before them and under its conditions, and, subject 
to constitutional objections as to its enforcement, they cannot be heard 
to complain of the terms under which they voluntarily invoked and 
received the grant of corporate existence from the state of Alabama." uo 

104 Note 71, supra. 

105 216 U. S. 56, 64, 30 Sup. Ct. Rep. 232 (1010). See also statement enoted on page 
590, supra, cited in note 70, supra. 

106 Note 7,2,, supra. See also page 580-581, supra. 

107 Note 97, supra. 

108 242 U. S. in, 37 Sup. Ct. Rep. 56 (1916). 

109 See note 61 , supra. 

110 242 U. S. in, 117, 37 Sup. Ct. Rep. 56 (1916). 



600 HARVARD LAW REVIEW 

For authority for its position the opinion goes back to Ashley v. 
Ryan, 111 thus implying that that case was not shaken by the West- 
ern Union Case. It is also said that the objections of the com- 
plainant "were so recently discussed, and the previous cases in this 
court considered in Kansas City, Ft. S. & M. R. Co. v. Botkin, 240 
U. S., 60 Law. Ed. 617, 36 Sup. Ct. Rep. 261, that it would be super- 
fluous to undertake extended discussion of the subject now." 112 

"In that case, after a full review of the previous decisions in this 
court, it was held that each case must depend upon its own circum- 
stances, and that while the state could not tax property beyond its 
borders, it might measure a tax within its authority by capital stock 
which in part represented property without the taxing power of the 
state. As to the objection based upon the due-process clause of the 
Constitution, we think that principle controlling here. There is no 
attempt in this case to levy a property tax; a franchise tax within the 
authority of the state is in part measured by the capital stock repre- 
senting property owned in other states." m 

It is true that the case cited said that each case must depend upon 
its own circumstances. But one of the circumstances in that case 
was that the annual imposition was limited to $2,500, however 
large the capital of the corporation. That circumstance was 
absent in the Louisville Case. But there was present in the Louis- 
ville Case the circumstance that the statute complained of was 
on the books when incorporation was sought and obtained. So 
it still remains to be settled by explicit decision that excises on 
domestic corporations previously chartered may be measured 
by any method that the state chooses to adopt. The remaining 
question still left open by the decisions of the Supreme Court is 
whether taxes on foreign corporations engaged in combined inter- 
state and intra-state commerce, other than some form of trans- 
portation using the same facilities for both kinds of commerce, 
may be measured by total capital stock with no limitation as to 
the amount to be paid. 

Since the foregoing sentence was written and in the hands of 
the printer, the question thus left open by previous decisions has 
been answered. On December 10, 191 7, the Supreme Court 

111 Note 33, supra. 

112 242 U. S. in, 118, 37 Sup. Ct. Rep. 56 (1916). 

113 Ibid. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 60 1 

decided Looney v. Crane Co., lu and declared invalid a Texas 
statute, imposing a franchise tax on foreign corporations, which 
was measured by total capital stock plus surplus and undivided 
profits. The opinion was by Chief Justice White. It seems to 
take the position that no foreign corporation engaged in com- 
bined domestic and interstate commerce within a state may be 
subjected to any tax as the price of the privilege of engaging in 
domestic commerce that would not be proper independently of 
the enjoyment of such privilege. There is no discussion of the 
economic effect on interstate business of withdrawal from local 
business. The opinion relies on "general principles" previously 
laid down in the Western Union Case 115 and the O'Connor Case. 116 
The economic integration of local and interstate transportation 
which was adverted to and seemingly relied on in those cases is 
absent in the Looney Case, for the complaining corporation was 
a foreign manufacturing concern. Its total assets in Texas, con- 
sisting of money, merchandise, and two warehouses, were assessed 
at $301,179. Its total paid-up capital was $17,000,000, and its 
surplus and undivided profits were $8,129,000. Its gross receipts 
for the year 1913 were $39,831,000, "of which only $1,019,750 had 
any relation to the State of Texas and nearly one-half of this 
amount was the result of transactions purely of an interstate 
commerce character arising from the sale and shipment of goods 
from other states to purchasers in Texas who ordered them and 
from the shipment from Texas to other states for the purpose of 
filling orders sent from such states." m 

The facts above given are stated in the opinion of the Chief 
Justice before the discussion of the constitutional question, but 
are not again mentioned. All questions of degree are explicitly 
dismissed from consideration. The Baltic Case 118 and others m 
relied on by the state are said to sustain in no way "the assumption 

114 Number 16, October Term, 1917; 38 Sup. Ct. Rep. 85 (1917). The decision 
was unanimous, but the fact that it was not reached without some difficulties may 
perhaps be inferred from the fact that the case was first argued on May 3, 1916, and 
restored to the docket for reargument May 2, 1917. It was reargued on November 6, 
1917, and decided December 10, 1917. 

U5 ' Note 43, supra. 

116 Note 83, supra. 

117 245 U. S. — 38 Sup. Ct. Rep. 85^, 86 (191 7). 

118 Note 85, supra. 

119 Cases cited in notes 94, 97, and 108, supra. 



602 HARVARD LAW REVIEW 

that because a violation of the Constitution was not a large one, 
it would be sanctioned, or that a mere opinion as to the degree of 
wrong which would arise if the Constitution were violated was 
treated as affording a measure of the duty of enforcing the Con- 
stitution." 120 If the attorneys for the state made and relied on 
any such assumption, they were unwise. Of course, if a statute 
violates the Constitution, it violates it. The excuse that the 
violation is "such a little one" cannot be entertained. But there 
may well have been more merit in the claim on behalf of the state 
than the fashion in which it was dismissed would indicate. If 
the effect on interstate commerce of a state tax on the privilege of 
doing local business is but slight, this may well warrant a decision 
that the tax does not "regulate" interstate commerce, but merely 
"incidentally affects" it. This is a familiar distinction applied 
in passing judgment upon state exercises of the police power which 
bear in some measure on interstate commerce. As Mr. Justice 
Holmes said in dealing with a somewhat analogous problem in- 
volving a state tax measured by receipts : 

"We are to look for a practical rather than a logical or philosophical 
distinction. ... A practical line can be drawn by taking the whole 
scheme of taxation into account. This must be done by this court as 
best it may. Neither the state courts nor the legislatures, by giving the 
tax a particular name or by the use of some form of words, can take away 
our duty to consider its nature and effect. If it bears upon commerce 
among the states so directly as to amount to a regulation in a relatively 
immediate way, it will not be saved by name or form." 121 

The fact that Mr. Justice Holmes himself declined to adopt this 
kind of reasoning in the Western Union Case is occasion for sur- 
prise. The further fact that Chief Justice White, who did follow 
such lines of thought in the Western Union Case, now abandons 
them in Looney v. Crane Co., 122 is also to be wondered at. The 
bridge which he built to escape from the force of earlier decisions 
seems to be wrecked after the crossing is safely made. Possibly 
this statement needs some qualification, for there is a reference in 
the opinion to "controlling decisions dealing with cases in substance 

120 245 U. S. — , 38 Sup. Ct. Rep. 85, 88 (1917). 

121 Galveston, H. & S. A. R. Co. v. Texas, note 41, supra,pa.ge 227. 

122 Note 114, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 603 

identical in fact and principle with the case here presented." 123 
By this the Chief Justice possibly means to imply that the difference 
between the business involved in the cases dealing with railroads, 
parlor-car companies, and telegraph companies, and that of the 
Crane Company in the principal case, is from a practical and 
economic standpoint immaterial. But the point is of enough im- 
portance to be more explicitly treated. If the Chief Justice in- 
tended to make it, he nevertheless used other language which, 
taken alone, would smother it. 

In addition to the franchise tax imposed by Texas, there was 
involved in the Looney Case a "permit" tax, based on total capital 
stock exclusive of surplus and undivided profits. The permit 
tax in force in Texas prior to 1907 was also based on capital stock, 
but there was a provision that no more than $200 should be charged 
for a ten-year permit, no matter how large the capital stock of 
the corporation seeking it. The Act of 1907 removed the limita- 
tion, so that the Crane Company would be compelled in 191 5 to 
pay $17,040 for the renewal of the ten-year permit, for which in 
1905 it paid only $200. Both the permit tax and the franchise 
tax were enjoined. They were resisted in reliance on the equal- 
protection clause, as well as on the due-process and commerce 
clauses, but the opinion of the court neglects the equal-protection 
clause, because it holds that both the commerce clause and the 
due-process clause render the complainant immune from the 
demands of the state. The central theme of the opinion is as 
follows : 

"It may not be doubted under the case stated that intrinsically 
and inherently considered both the permit tax and the tax denominated 
as a franchise tax were direct burdens on interstate commerce and more- 
over exerted the taxing authority of the State over property and rights 
which were wholly beyond the confines of the State and not subject to 
its jurisdiction and therefore constituted a taking without due process. 
It is also clear, however, that both the permit tax and the franchise tax 
exerted a power which the State undoubtedly possessed, that is, the 
authority to control the doing of business within the State by a foreign 
corporation and the right to tax the intra-state business of such corpora- 
tion carried on as a result of permission to come in. The sole contention, 

then, upon which the acts can be sustained is that although they exerted 

w 

123 245 U. S. — 38 Sup. Ct. Rep. 85, 87 (1917). 



604 HARVARD LAW REVIEW 

a power which could not be called into play consistently with the Con- 
stitution of the United States, they were yet valid because they also 
exercised an intrinsically local power. But this view can only be sus- 
tained upon the assumption that the limitations of the Constitution of 
the United States are not paramount but are subordinate to and may be 
set aside by state authority as the result of the exertion of a local power. 
In substance, therefore, the proposition must rest upon the theory that 
our dual system of government has no existence because the exertion 
of the lawful powers of the one involves the negation or destruction of 
the rightful authority of the other. But original discussion is unneces- 
sary since to state the proposition is to demonstrate its want of foundation 
and because the fundamental error upon which it rests has been con- 
clusively established." m 

Needless to say, the proposition would not be so stated except 
by one who wished to demonstrate its want of foundation. It 
was not so stated by Mr. Justice Holmes in his dissent in the 
Western Union and Pullman cases. It was not so stated by Mr. 
Justice Day in Kansas City, M. & B. R. Co. v. Stiles, 12b which 
sustained a tax on a consolidation of domestic corporations en- 
gaged in local and interstate transportation, although the tax 
was measured by the total capital stock, with no provision for a 
maximum. Every word of Chief Justice White's opinion above 
quoted might be applied with equal logic to the taxes on domestic 
corporations, measured by total capital stock. Yet the Chief 
Justice agrees that such taxation is proper. If a different decision 
in the Looney Case would deny the existence of the federal system, 
so does the actual decision of the Stiles Case from which the Chief 
Justice does not dissent; for the tax in that case was "intrinsically 
and inherently" beyond the power of the state, if this means that, 
but for the fact that the subject taxed was a privilege granted 
by the state, the tax could not be imposed. 

The issue in these cases is not to be solved by the logic of the 
Absolute. Mr. Justice Holmes tried it in his dissent in the Western 
Union and Pullman cases. Since the state may deny the privilege, 
he says, it may burden it as it pleases, even though it also burdens 
interstate commerce. And now the Chief Justice, in similar 
absolutistic vein, says that, if the tax is intrinsically on interstate 
commerce, it does not matter that it is also on something else 

m 245 U. S. — , 38 Sup. Ct. Rep. 85, 87 (1917). 
w Note 108, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 605 

which is within the authority of the state. It looks like a dilemma, 
and it is, so far as any inexorable logic is concerned. The problem 
of a dilemma cannot be solved by competing asseveration. It is 
a question of more or less. We can find an illuminating guide to the 
way out of the difficulty, by appealing from Mr. Justice Holmes 
in the Western Union Case to Mr. Justice Holmes in Hudson County 
Water Co. v. McCarter. m In his opinion in that case he tells us: 

"All rights tend to declare themselves absolute to their logical extreme. 
Yet all in fact are limited by the neighborhood of principles of policy 
which are other than those on which the particular right is founded, 
and which become strong enough to hold their own when a certain point 
is reached. . . . The boundary at which the conflicting interests balance 
cannot be determined by any general formula in advance, but points 
along the line, or helping to establish it, are fixed by decisions that this 
or that concrete case falls on the nearer or farther side. ... It con- 
stantly is necessary to reconcile and adjust different constitutional 
principles, each of which would be entitled to possession of the disputed 
ground but for the presence of the others." 127 

It is a constitutional principle that a state may not impose 
taxes on interstate commerce. It is another constitutional principle 
that a state may impose taxes on the privilege granted to a foreign 
corporation to carry on local business within the state. The taxes 
involved in the Western Union Case and in the Looney Case were 
on such a privilege. They were also on interstate commerce. They 
come within both constitutional principles. One would declare 
them valid; the other, invalid. One or the other must yield, for 
the taxes cannot be both valid and invalid. With respect to such 
taxes on the privilege of being a domestic corporation, Chief 
Justice White agrees that the commerce clause must yield. With 
respect to similar taxes on foreign corporations, he insists that the 
commerce clause must prevail, or else "the limitations of the 
Constitution of the United States are not paramount." If either 
case stood alone, it would be simpler than when the two are found 
side by side, and both by a unanimous court. 

The situation is one that cannot be solved by a formula, as 
Mr. Justice Holmes has told us. Nevertheless in his dissenting 
opinion in the Western Union Case he made use of a formula 

126 209 U. S. 349, 28 Sup. Ct. Rep. 529 (1908). 

127 209 U. S. 349, 3557357, 28 Sup. Ct. Rep. 529 (1908). 



606 HARVARD LAW REVIEW 

which he seemed to regard as convincing. "It does not matter," 
he says, "if the sum [imposed by the State] is extravagant. Even 
in the law the whole generally includes its parts. If the state 
may prohibit, it may prohibit with the privilege of avoiding the 
prohibition in a certain way." 128 Thus he implies that complete 
prohibition of local business is a whole, of which the imposition of 
heavy burdens for the privilege of conducting such local business 
is a part. But the relation of whole and parts exists only where we 
are dealing with units that are commensurable; and the power of 
imposing heavy burdens is not a part of the power of absolute 
exclusion, for the two are not commensurable. It might as well 
be urged that capital punishment is a whole, of which a day's 
torture is a part, and that, therefore, the government which might 
put a man to death for treason may impose torture instead. Less 
of life is taken by brief torture than by death. But the interests 
affected by torture are not identical with those affected by death. 
One conflicts with the constitutional prohibition against cruel 
and unusual punishments, and the other does not. So the interests 
affected by heavy burdens on .corporations doing a combined local 
and interstate business are different from those affected by exclud- 
ing the corporation from local business. A state legislature which 
forbade all foreign corporations to carry passengers on intra-state 
journeys within the state would soon learn that it had affected 
interests which had not been touched by measuring a tax on such 
corporations by their total capital stock. A state is not exercising 
its power of exclusion when it imposes an excise tax. If necessary, 
this can be established by a syllogism. And a syllogism would 
show that the power to exclude does not necessarily carry with it 
the power to impose heavy burdens, 129 any more than the power 
of an owner of property to forbid, or to permit, others to use it, 
carries with it the power to exact any and all conditions whatever 
of those admitted to its use. 

Of course the policy which permits complete exclusion may well 
permit the exaction of heavy burdens on those admitted. But 
this is not necessarily true. The interests to be balanced are not 
the same in both exertions of state authority. And the decision 
with respect to each should be based on the pros and contras of 

128 Quoted on page 585, supra. 

1:9 See 16 Col. L. Rev. 99, 110-11. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 607 

the particular issue in dispute. The problem is a "practical," 
rather than a "logical or philosophical," one, if logic and philosophy 
involve the disregard of practical considerations. According to a 
modern, mundane school of philosophy, however, logic can stoop 
to the practical, and wade through a world of particulars making 
differentiations on the basis of results, rather than of superimposed 
categories. This school would doubtless rephrase the dictum of 
Mr. Justice Holmes and say that the problem is a "logical," rather 
than a "metaphysical," one. 130 But the difference would be merely 
one of nomenclature. Both would agree in general that burdens 
as the price of admission should be treated differently from ex- 
clusion, if the two had substantial differences of result. Mr. Justice 
Holmes, it is to be observed, implied in his dissent in the Western 
Union Case that the corporation would abandon its local business 
if such business did not yield the tax assessed thereon. If he was 
correct in this, the burden would be no greater than that ensuing 
from exclusion from such business. But the corporation might, 
on the other hand, continue the local business and recoup itself 
for the tax thereon by maintaining or increasing interstate rates, 
if the Interstate Commerce Commission would permit it. This 
might be more of a burden on interstate commerce than would 
follow from exclusion from connected intra-state commerce. 

It seems likely, however, that heavy taxation on connected 
intra-state commerce is no more of a burden on interstate com- 
merce than exclusion from the local business would be. Mr. 
Justice Holmes is probably correct in insisting that the two exercises 
of state power should be treated alike. The doctrine of the majority 
in the Western Union Case really shakes the foundation of the 
previously declared rule that the state has complete power to 
exclude from local business a foreign corporation seeking to do a 
combined local and interstate business. Mr. Justice Holmes seems 
aware of this when he says in his dissent in the Pullman Case, that 

130 Compare Mr. Justice Bradley, in Philadelphia & Southern Mail S. S. Co. v. 
Pennsylvania, 122 U. S. 326, 336-37, 7 Sup. Ct. Rep. 1118 (1887) : "If the state cannot 
tax the transportation, may it, nevertheless, tax the fares and freights received therefor? 
Where is the difference? Looking at the substance of things, and not a mere form, it is 
very difficult to see any difference. The one thing seems to be tantamount to the 
other. It would seem to be rather metaphysics than plain logic for the state officials 
to say to the company: 'We will not tax you for the transportation you perform, 
but we will tax you for what you get*for performing it.' Such a position can hardly 
be said to be based on a sound method of reasoning." 



608 HARVARD LAW REVIEW 

exclusion from local business is not a burden on interstate business, 
but only the denial of a collateral benefit. 131 He, it would seem, 
regards local and interstate transportation, not as joint products, 
but each as a by-product of the other. The contrary view seems 
in better accord with business sense. It is now established that 
intra-state rates must fit into the system of interstate rates, 132 
because interstate commerce is affected by relatively low intra- 
state rates. And in West v. Kansas Natural Gas Co., 133 Mr. Justice 
McKenna quoted with approval a statement that "no state can by 
action or inaction prevent, unreasonably burden, discriminate 
against, or directly regulate interstate commerce or the right to 
carry it on." 134 From such a statement it would follow that a 
state could not refuse to let a corporation carry on intra-state 
commerce in connection with its interstate commerce, if such 
refusal unreasonably burdened the interstate commerce. It is 
to be anticipated that a state, if it actually forbade unconditionally 
any intra-state commerce which was intimately connected with 
interstate commerce, would find its power circumscribed as is its 
power over intra-state rates which affect interstate commerce. 
Exclusion from local business and burdensome taxation on that 
business are probably so similar in their effect on economically 
related interstate commerce that they should be treated alike in 
deciding whether in substance they constitute "regulations" of 
interstate commerce. Grant Mr. Justice Holmes' hypothesis, and 
his conclusion is sensible. But his hypothesis is one that the 
modern development and integration of certain kinds of com- 
merce require us to scrutinize and probably to abandon. 

But this scrutiny should keep close to the turf of fact. It should 
not be as doctrinaire as the assertion that a tax, if levied on local 
business, cannot be a regulation of interstate commerce, or the 
contrary assertion that a tax, if measured by elements of inter- 
state commerce, must necessarily be a regulation of that com- 
merce, even though the subject taxed is local commerce. In form 
all the state taxes which we have been considering are regulations 

131 See passage quoted on page 585, supra. 

132 Houston, E. & W. T. R. Co. v. United States, 234 U. S. 342, 34 Sup. Ct. Rep. 833 
(1914); American Express Co. v. South Dakota, 244 U. S. 617, 37 Sup. Ct. Rep. 656 

(1917)- 

133 221 U. S. 229, 31 Sup. Ct. Rep. 564 (1911). 

134 221 U. S. 229, 262, 31 Sup. Ct. Rep. 564 (1911). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 609 

of something else than interstate commerce. In substance they 
have all had some effect on interstate commerce. At the beginning 
the form was regarded as controlling. The reason given for refusing 
to consider the substance was that the privilege taxed by the state 
might be surrendered, and the imposition thereby avoided. Later 
a majority of the court became convinced that in certain kinds 
of business the abandonment of local business would itself be so 
substantial a burden on the interstate business as to amount to 
a "regulation" thereof. Such an abandonment might in a very 
real sense be a "regulation" of interstate commerce, even though 
it were to be regarded as the denial of a collateral benefit rather 
than the imposition of a burden. For in common sense the effective 
and economical conduct of interstate transportation requires the 
collateral benefit of uniting local transportation with that between 
the states. So also local transportation requires the collateral 
benefit of interstate transportation. The same roadbed and the 
same facilities and men are used for both. The physical separation 
of the two would be an act of folly. To allow a state to require 
a corporation to choose between such separation and excessive 
burdens on the local business is to allow it to interfere seriously with 
the only reasonable method of conducting the interstate business. 
It by no means follows, however, that what is true of the trans- 
portation business is true of all other businesses. And if the 
transition which the court made in the Western Union Case was 
one from form to substance, substance rather than form should be 
regarded in applying the new doctrine to other businesses than 
those which inevitably use the same facilities in both local and 
interstate commerce. But the reasoning of Chief Justice White in 
the Looney Case is formal rather than substantial. On the one 
hand, it is conceded that the state is exercising "an intrinsically 
local power." This is because the subject on which the tax is levied 
is within the taxing jurisdiction of the state. On the other hand, 
the tax so levied, "intrinsically and inherently considered," is 
a direct burden on interstate commerce. This is because it is 
measured by total capital stock, and therefore depends for its 
amount on the entire assets and business of the corporation, and 
not merely on those local to the state. The Chief Justice concludes 
that it inexorably follows that a tax so measured is an invalid 
regulation of interstate commerce. All his colleagues concur in 



610 HARVARD LAW REVIEW 

the result and none expresses dissent from the reasoning. Yet the 
Chief Justice and the same colleagues all agree that a tax on a 
domestic corporation similarly measured is not a regulation of 
interstate commerce. 135 On any basis of purely formal reasoning, 
the two decisions are irreconcilably opposed. 136 

135 Kansas City, M. & B. R. Co. v. Stiles, note 108, supra. 

136 There may be a practical reason why it is not necessary to circumscribe the 
power of a state in its taxation of the franchises of domestic corporations engaged 
in interstate commerce. If the tax becomes unduly burdensome, the corporation 
may surrender its state charter and obtain a federal charter. Congress, under the 
power to establish post offices and post roads, and the further power to make all 
necessary and proper laws for carrying into effect the postal power, may charter a 
corporation to engage in intra-state, as well as in interstate, transportation. Such 
a franchise would be immune from state taxation. California v. Central Pacific Rail- 
road Co., 127 U. S. 1, 8 Sup. Ct. Rep. 1073 (1888). See note 171, page 371, supra. 
See also Lindsay Rogers, The Postal Power of Congress (Baltimore, 10, 91-96, 

i5o-57- 

Now that the federal government has taken over the control and management of 
the railroads under the war power, and under the terms proposed at this writing 
(January 7, 1918), will pay to the roads guaranteed dividends on the stock, and will 
therefore be affected financially by all state taxes on the property and franchises and 
intra-state business of the roads, interesting and important questions are raised with 
respect to the power of the states to impose without the consent of Congress any 
taxes which affect the net income from operation and management. From an economic 
standpoint the fact that the roads are still privately owned is unimportant, if the 
government is to pay what amounts to a rental determined by dividends in past 
years. A state tax on intra-state receipts will come out of the United States govern- 
ment. Could such a tax be imposed without the consent of Congress? It is clear that 
no state could tax receipts derived from business for the government. Western Union 
Telegraph Co. v. Texas, 105 U. S. 460 (1881). But does this rule now apply to all 
the business done? South Carolina v. United States, 199 U. S. 437, 26 Sup. Ct. Rep. 
no (1905), establishes that the federal government may tax business of a private 
nature conducted by a state. It does not follow, however, that a similar doctrine 
will be applied to state taxation of private business conducted by the United States 
government; for, though the state cannot tax franchises granted by the United States, 
California v. Central Pacific Railroad Co., supra, the United States can tax franchises 
granted by the state, or, what is the same in effect, the doing of business by virtue 
of such franchises. Flint v. Stone Tracy Co., 220 U.S. 107,31 Sup. Ct. Rep. 342 (191 1). 
Furthermore, in Van Brocklin v. Tennessee, 117 U. S. 151, 6 Sup. Ct. Rep. 670 (1886), 
it was declared by Mr. Justice Gray that "The United States does not and cannot hold 
property, as a monarch may, for private or personal purposes." But this was nearly 
twenty years before the South Carolina Case, and things have moved since then. 
One who was not timid about making prophecies might feel fairly safe in venturing 
to predict that the Supreme Court would not withdraw from the taxing powers of 
the states, the local and private business done by the railroads under government 
operation, unless Congress should expressly prescribe otherwise. 

Since it is held that a state tax on property may be measured by receipts from 
interstate commerce, United States Express Co. v. Minnesota, 223 U. S. 335, 32 Sup. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 611 

This return to scholasticism after the realistic attitude adopted 
in the Western Union Case is disappointing, especially to one who 
had previously completed for incorporation in this article a dis- 
cussion of state decisions subsequent to the Western Union Case, 
which discussion had as its keynote the statement that "the Su- 
preme Court has abandoned the test of artificial legal distinctions 
for the test of practical results," and the further statement that 
"whether any tax on domestic business burdens interstate com- 
merce depends of course on the effect on interstate commerce of 
abandoning the local business." In this unpublished discussion 
the opinion was ventured that the Supreme Court might, in deal- 
ing with taxes on corporations not engaged in transportation, 
"regard the actual burden imposed by any tax on interstate com- 
merce," and therefore "take account of the rate of levy as well 

Ct. Rep. 211 (1912), and that property privately owned, but employed in work for 
the federal government, is not exempt from state taxation, Baltimore Shipbuilding 
Co. v. Baltimore, 195 U. S. 375, 25 Sup. Ct. Rep. 50 (1904), and Gromer v. Standard 
Dredging Co., 224 U. S. 362, 32 Sup. Ct. Rep. 499 (191 2), it seems likely that the 
existing state taxes on the property of the railroads would not be affected by their 
transition to governmental control. If a state tax on property may be measured by 
receipts from interstate commerce, it would seem that it might also be measured by 
receipts from the federal government, under the doctrine of Home Insurance Co. v. 
New York, note 31, supra. See 31 Harv. L. Rev. 321, 334-35. Of course the theory 
of the opinion in Looney v. Crane Co., note 114, supra, would require the overruling 
of the Home Insurance Case, since the most recent pronouncement of the Supreme 
Court takes the position that the states cannot use their lawful powers in ways that 
resemble too closely the use of unlawful powers, and that, therefore, they cannot 
measure taxes on proper subjects by elements that cannot be taxed directly. But no 
case has as yet applied this doctrine to state taxes which are indirect encroachments 
on federal instrumentalities. 

The Home Insurance Case would by inference authorize the states to measure 
taxes on corporate franchises by receipts from the United States government. But 
later cases under the commerce clause forbid measuring state taxes on privileges of 
foreign corporations by total capital stock, though taxes on domestic franchises may 
be so measured. From these decisions, except for the doubts engendered by the 
opinion in the Looney Case, we might assume that state taxes on the franchises of 
domestic corporations operating railroads will not be affected by the federal control 
of the roads. As to state taxes on privileges of foreign corporations engaged in trans- 
portation, and now managed by the federal government, the answer to the question, 
whether they can be measured by receipts from the United States, would depend upon 
whether the court will regard the measure of receipts as vicious as the measure of 
total capital stock, and of course upon the general question whether, since the new 
enterprise of the national government is essentially private and pecuniary as dis- 
tinguished from governmental, the doctrine of the South Carolina Case will apply. 
At any rate, Congress should by specific legislation prevent all these troublesome 
questions from arising. 



612 HARVARD LAW REVIEW 

as the measure to which that rate is applied." But the opinion 
of the Chief Justice in Looney v. Crane 'Co} 31 seems to give a death 
blow to those prophecies. It indicates that no longer does each 
case depend upon its own circumstances, as previous decisions of 
the court had declared. 138 

There is of course a distinct advantage in declaring that the 
measure of total capital stock, with no provision for a maximum, 
cannot be applied to an excise on a foreign corporation engaged 
in any kind of interstate commerce in connection with its local 
business. Such a measure has vicious potentialities, and it may 
be well to outlaw it, even when it is kept in leash by an infinitesimal 
rate of levy. Such outlawry will relieve the court from considering 
in each case the ratio between the local business and the total 
business of the corporation, and from determining whether the 
sum exacted by the application of the measure is out of proportion 
to the value of the privilege of conducting local business. The 
court will still have to consider such questions in determining 
whether the maximum provision in such statutes as that applied 
in the Baltic Case is sufficiently low. Corporations with little 
capital might prefer a low rate applied to total capital, with no 
maximum, to a higher rate applied to total capital, with a maximum 
which would not affect the amount exacted of them. The Supreme 
Court may be pardoned for a desire to get back to some broad 
general rules, after the confusion engendered by its distinction 
between the Western Union Case and the Baltic Case. Yet the 
references to the business of the complainants in the Baltic Case, 
and to the excess of their actual assets over their authorized capital, 
warrant the belief that the court in that case did not mean to 
declare that a $2,000 maximum rendered completely innocuous 
the measure of total capital stock, so that the Massachusetts 
statute was necessarily applicable to every foreign corporation. 
If Massachusetts should increase its rate of levy, the provision 
that the tax should not exceed $2,000 might not be sufficient to 
save it from burdening the interstate commerce carried on by 
corporations with a small capital stock. So that even after the 
Looney Case, it may be impossible for the court to avoid the con- 
sideration of the details and size of the business of a foreign cor- 

137 Note 114, supra. 

138 See quotations to this effect, on pages 595, 598, 600, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 613 

poration subjected to an excise tax, measured by total capital 
stock, but limited in amount. So long as the court gives weight 
to such considerations, it may apply the statute to some corpora- 
tions and decline to apply it to others. It is by no means certain 
that such formal reasoning as was applied in the Looney Case 
will be applied to future cases on the subject under consideration. 
The reasoning in a judicial opinion reflects primarily the attitude 
of the particular judge who writes it. So long as his colleagues 
are satisfied with the disposition of the case, they may be disin- 
clined to express disagreement with the opinion, merely because it 
may strike some contributor to a legal periodical as tending to 
formalism, where formalism is thought undesirable. 

It cannot be gainsaid that there is wholesome sense in forbidding 
a state to measure any excise tax by property or business without 
the state. The opinion in the Looney Case, by invoking the due- 
process clause as well as the commerce clause, indicates that a 
tax on foreign corporations engaged solely in domestic business 
cannot be measured by total capital stock. This doctrine would 
overrule Horn Silver Mining Co. v. New York. 139 Such an intention 
on the part of the Supreme Court is, however, not to be safely 
inferred, since the due-process clause may be used in the Looney 
Case merely as a flying buttress to support the wall erected on 
the foundations of the commerce clause. But the law on the 
taxation of foreign corporations has shown itself to be far from 
rigid since 1910, and prophecies are dangerous, as the plight of 
one who wrote before the Looney Case demonstrates. 

A consideration of Chief Justice White's discussion of earlier 
cases may lead to the conclusion that he does not abandon practical 
considerations so completely as some of his language in the Looney 
Case suggests. But his use of the practical is for the purpose of 
differentiating the cases adduced on behalf of the state. Of the 
Western Union Case and those following it which sustained ob- 
jections of the taxpayers, 140 he says that they 

139 143 U. S. 305, 12 Sup. Ct. Rep. 403 (1892). See also Philadelphia Fire Ass'n 
v. New York, 119 U. S. no, 7 Sup. Ct. Rep. 108 (1886). 

* 40 These are the cases cited in notes 43, 44, 81, and 83, supra, and International 
Textbook Co. v. Pigg, 217 U. S. 91, 30 Sup. Ct. Rep. 481 (1910). The Pigg Case 
involved a statute requiring all foreign corporations, as a prerequisite to bringing 
suit in the courts of the state, to file with the secretary of state a statement of their 
financial condition, etc. The case held that the statute could not be applied to 



614 HARVARD LAW REVIEW 

"were concerned in various forms with the identical questions here 
involved and authoritatively settled that the states are without power 
to use their lawful authority to exclude foreign corporations by directly 
burdening interstate commerce as a condition of permitting them to do 
business in the state in violation of the Constitution, or because of the 
right to exclude, to exert the power to tax the property of the corporation 
and its activities outside of and beyond the jurisdiction of the state in 
disregard, not only of the commerce clause, but of the due process clause 
of the Fourteenth Amendment." 141 

This is true, in so far as the general principle is concerned. But 
the. cases involved, not only the general principle, but the applica- 
tion of it to the facts of each case. Those facts included the char- 
acter of the complainant's business 142 as well as the measure of 
the tax. The questions involved in the earlier cases are not identi- 
cal with those involved in the Looney Case, unless the businesses 
in all the cases are identical. This point the Chief Justice over- 
looks. This is apparent from the following quotation from his 
opinion : 

"The dominancy of these adjudications is plainly shown by the fact 
that as a result of the decision in the leading case (Western Union Tele- 
graph Co. v. Kansas, 216 U. S. 1, 30 Sup. Ct. 190, 54 L. Ed. 355) the 
Supreme Court of the state of Texas, recognizing the repugnancy of the 
permit tax law here in question to the Constitution of the United States, 
enjoined its enforcement (Western Union Telegraph Co. v. State, 103 Tex. 
366, 126 S.W. 1197), . . ." 143 

But that Texas decision involved the same corporation which suc- 
ceeded in escaping from the Kansas statute in the Western Union 
Case. The Texas decision was rendered less than three months 
after that of the Supreme Court, 144 and three years before the 

foreign corporations engaged in interstate commerce, and that the correspondence 
school whose rights were in issue was engaged in such commerce. 

141 245 U. S. — , 38 Sup. Ct. Rep. 85, 87 (1917). 

142 Note the emphasis on this point by Mr. Justice White in the passage quoted 
on page 587, supra, and by Mr. Justice Harlan in the passage quoted on pages 590-91, 
supra. 

143 245 U. S. — , 38 Sup. Ct. Rep. 85, 87 (1917). 

144 The full opinion of the Texas supreme court, by Mr. Chief Justice Gaines, was 
as follows: 

" Since this suit was brought to this court, the Supreme Court of the United States 
in the case of Western Union Telegraph Co. v. The State of Kansas, has ruled that 
a similar law of Kansas was unconstitutional. This renders unnecessary any dis- 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 615 

decision in the Baltic Case, 145 which involved a business like that 
of the complainant in the Looney Case, and not like that of the 
Western Union Telegraph Company. 

In the Looney Case, the state naturally sought to sustain the 
tax on the authority of the Baltic Case and those following it, 
in which the complaining taxpayer was denied relief. 146 But the 
Chief Justice answers: 

"The incongruity of the contention will be manifest when it is observed 
that not only did the cases relied upon contain nothing expressly purport- 
ing to overrule the previous cases, but on the contrary in explicit terms 
declared that they did not conflict with them and that they proceeded 
upon conditions peculiar to the particular cases. . . . 147 These conditions 
related to the subject-matter upon which the tax was levied, or to the 
amount of taxes in other respects paid by the corporation, or limita- 
tions on the amount of the tax authorized when a much larger amount 
would have been due upon the basis upon which the tax was apparently 
levied. . . . 148 

"It follows, therefore, that the cases which the argument relies upon 
do not in any manner qualify the general principles propounded in the 
previous cases upon which we have rested our conclusion since the later 
cases rested upon particular provisions in each particular case which it 
was held caused the general and recognized rule not to be applicable." 149 

cussion of the question involved in this suit. Upon the authority of the case cited, 
the judgments of the District Court and of the Court of Civil Appeals are reversed 
and judgment here rendered for the Western Union Telegraph Company." 

145 Note 85, supra. 

146 These are the cases cited in notes 85, 94, 97, and 108, supra. 

147 245 U. S. — , 38 Sup. Ct. Rep. 85, 87 (1917). 

148 245 U. S. — , 38 Sup. Ct. Rep. 85, 88 (191 7). 

149 245 U. S. — , 38 Sup. Ct. Rep. 85, 88 (1917). In the same paragraph, the Chief 
Justice also says of the Baltic Case and those following it in which taxes were 
sustained: 

"In the first place it is apparent in each of the cases that as the statutes under 
consideration were found not to be on their face inherently repugnant either to the 
commerce or due process clauses of the Constitution, it came to be considered whether 
by their necessary operation and effect they were repugnant to the Constitution in 
the particulars stated, and this inquiry it was expressly pointed out was to be governed 
by the rule long ago announced in Postal Telegraph Cable Co. v. Adams, 155 U. S. 
688, 698, 15 Sup. Ct. Rep. 268, 270 that 'the substance, and not the shadow deter- 
mines the validity of the exercise of the .power.' In the second place, in making 
the inquiry stated in all of the cases, the compatibility of the statutes with the 
Constitution which was found to exist resulted from particular provisions contained 
in each of them which so qualified and restricted their operation and necessarily so 
limited their effect as to lead to such results." 

From the application of the foregoing language to the Stiles Case, note 108, supra, 



616 HARVARD LAW REVIEW 

The general and recognized rule adverted to may be phrased as 
the rule that the power of the state to tax intra-state commerce, 
or some privilege granted by the state, does not involve the power 
to destroy intra-state commerce, if such destruction would sub- 
stantially burden interstate commerce. But the application of this 
general rule to any particular case necessitates the inquiry whether 
the abandonment of intra-state commerce in order to escape the 
tax, would in fact substant'ally burden interstate commerce. Pre- 
vious to the Looney Case, at any rate, there was no general rule 
that a state tax on a proper subject could not be measured by 
elements which could not be subjected to direct taxation. If there 
was any general rule, it was to the contrary effect. 150 The only 
recognized exception to this previous general rule was, that a tax 
on the privilege of a foreign transportation corporation to carry on 
domestic commerce could not be measured by total capital stock 
with no maximum limitation. In the Looney Case, a similar excep- 
tion is established in favor of foreign corporations making both local 
sales within the state, and also interstate sales within and with- 
out the state. But the exceptions now seem to constitute a new 
"general and recognized rule." Yet to this new rule there are 
exceptions in favor of excises on domestic corporations, even if 
engaged in interstate transportation, and in favor of foreign 
corporations engaged in local sales, if a reasonable limit is set to 
the annual imposition. 

The opinion in the Looney Case is to be criticized for its failure 

a tax on a domestic corporation engaged in interstate as well as intra-state trans- 
portation, measured by total capital stock with no maximum limitation, is not on its 
face inherently repugnant to the Constitution. From its application to the Baltic 
Case, note 85, supra, a tax on a foreign corporation, measured by total capital stock 
with a maximum limitation of $2,000, is not inherently repugnant to the Constitution, 
even as applied to corporations engaged in interstate as well as intra-state sales. But 
the Texas statute under review, by selecting the total capital stock as a measure of a 
tax on the franchise of a foreign corporation whose business is substantially like that 
of the S. S. White Dental Company involved in the Baltic Case, makes the tax one 
which "intrinsically and inherently considered" is a direct burden on interstate com- 
merce, and the exercise of "a power which could not be called into play consistently 
with the Constitution. . . ." 

160 For recognitions of this rule in opinions of the Supreme Court subsequent to 
the Western Union Case, see the quotations from the opinion in the Baltic Case on 
page 596, supra, from the opinion in the Stiles Case on page 599, supra, and from the 
opinion in Flint v. Stone Tracy Co., 220 U. S. 107, 165, 166, 31 Sup. Ct. Rep. 342 
(1911), in note 42 on pages 333-34, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 617 

to tell us why foreign corporations engaged in the business of 
making local and interstate sales within the state are excepted from 
the former general rule, and included in the new general rule, when 
domestic corporations conducting a combined local and interstate 
transportation business are not. None of the reasoning in the 
opinion accounts for this difference of treatment. It would have 
been well, too, to have pointed out explicitly that the provision 
for a maximum in the Massachusetts statute applied in the Baltic 
Case was essential to the decision of that case, and that the fact 
that the corporations there involved were not engaged in trans- 
portation was not alone sufficient to justify measuring an excise 
on their local business by their total capital stock. For the Massa- 
chusetts supreme court assumed the contrary 151 three months 
before the United States Supreme Court decided the Looney Case. 
By reverting to "general and recognized rules" the Supreme Court 
is unnecessarily confusing the state courts, particularly when the 
Supreme Court recognizes that there are exceptions to these 
"general" rules, and fails to state specifically why the case at bar 
does not come within such exceptions. 

Though the opinion in the Looney Case is less illuminating than 
might be desired, the decision establishes that the measure of 
total capital stock, with no provision for a maximum, is inherently 
and incurably vicious, when applied to an excise on a foreign cor- 
poration manufacturing goods in other states, and making domestic 
and interstate sales within the state. The reasoning of the opinion 
would, taken by itself, lead one to infer that the doctrine of the 
case would apply also to a foreign corporation engaged in local 
manufacturing and making local and interstate sales within the 
state. 152 It would lead one to infer that the doctrine would apply 
to an excise on foreign corporations, measured by any receipts 
which included receipts from interstate commerce. 153 But the 
reasoning would lead also to the inference that the doctrine would 
apply to a domestic corporation and to a tax on the property of a 
foreign corporation, measured by receipts which include receipts 
from interstate commerce. We know, however, that the doctrine 

151 International Paper Co. v. Commonwealth (Mass.), 117 N. E. 246 (September 

13, I9 1 ?)- 

152 The contrary was held in International Paper Co. v. Commonwealth, note 151, 
supra, and Atlas Powder Co. v. Goodloe, 131 Tenn. 490, 175 S. W. 547 (1915). 

163 The contrary was held in Baldwin Tool Works v. Blue, 240 Fed. 202 (1916). 



618 HARVARD LAW REVIEW 

does not apply to such cases. 154 Therefore we cannot rely for our 
exposition of the law on the general statements made in the Looney 
opinion. We must still seek the law in the concrete decisions, and 
not in the general statements. Of course in this respect the de- 
cisions and opinions under review are not peculiar. The vital 
principle of the law is to be found not in abstract doctrine, but in 
specific and detailed adjustments of concrete situations. 

(To be continued.) 

Thomas Reed Powell. 
Columbia University. 

154 Kansas City, F. S. & B. R. Co. v. Stiles, note 108, supra; United States Express 
Co. v. Minnesota, 223 U. S. 335, 32 Sup. Ct. Rep. 211 (1912). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 721 



INDIRECT ENCROACHMENT ON FEDERAL 

AUTHORITY BY THE TAXING POWERS 

OF THE STATES. 1 Ill 

II. Regulations of Interstate Commerce (continued) 

2. Taxes not Discriminating against Interstate Commerce (continued) 

A. taxes on privileges (concluded) 

(c) State Decisions Subsequent to the Western Union Case 

T)RIOR to 1910 the states had good grounds for assuming that 
-■■ they might impose such excises as they pleased on the franchises 
of domestic corporations 2 or on the privileges of foreign corpora- 
tions to enter the state to carry on domestic commerce. 3 The 
prevailing judicial thought seemed to be that, since these were 
privileges that the state might withhold, it therefore followed as the 
night the day that they were privileges which, when granted, the 
state might tax as it willed. But in Western Union Telegraph Co. 
v. Kansas* the Supreme Court held that Kansas could not require 
a foreign corporation, doing a combined local and interstate tele- 
graph business within the state, to pay for the privilege of doing 
local business a fee which was measured by its total capital stock. 
Owing to the fact that the judges who composed the majority were 
not fully agreed on the reasons for the decision, it was difficult to 
state the exact proposition of law for which the case stood. It was 
clear, however, that the case cracked the doctrine, previously pre- 
vailing, that the power of a state to exclude foreign corporations 

1 For preceding installments of this discussion, see 31 Harv. L. Rev. 321-72 (Jan- 
uary, 1918) and 31 Harv. L. Rev. 572-618 (February, 1918). 

2 State Tax on Railway Gross Receipts, 15 Wall. (82 U. S.) 284 (1872); Delaware 
Railroad Tax, 18 Wall. (85 U. S.) 206 (1873); Railroad Co. v. Maryland, 21 WaU. (88 
U. S.) 456 (1874); Ashley v. Ryan, 153 U. S. 436, 14 Sup. Ct. Rep. 865 (1894). See 31 
Harv. L. Rev. 576-81. 

3 Maine v. Grand Trunk Railway Co., 142 U. S. 217, 12 Sup. Ct. Rep. 121 (1891); 
Pullman Co. v. Adams, 189 U. S. 420, 23 Sup. Ct. Rep. 494 (1903); Allen v. Pullman's 
Palace Car Co., 191 U. S. 171, 24 Sup. Ct. Rep. 39 (1903). See 31 Harv. L. Rev. 579- 
80, 582-83. 

4 216 U. S. 1, 30 Sup. Ct. Rep. 190 (1910). See 31 Harv. L. Rev. 584-94. 



722 HARVARD LAW REVIEW 

from intra-state commerce within its borders, carried with it abso- 
lute discretion in imposing taxes on those admitted to carry on such 
commerce. It was apparent, too, that the new departure was in- 
fluenced by the character of the business in which the complaining 
corporation was engaged. Mr. Justice White, whose opinion pro- 
ceeded mainly on an application of the due-process clause, stated 
that "the continued beneficial existence of the investment depends 
upon the right to use the property ... for both interstate and 
local business." 5 If the local business is given up in order to avoid 
a tax measured by property outside of the state, "the property 
established for the purpose of doing local business becomes worth- 
less and is in effect confiscated." 6 And Mr. Justice Harlan said 
that the "state knows that the Telegraph Company, in order to 
. . . make its telegraphic system effective, must do all kinds of 
telegraph business." 7 

Later in Baltic Mining Co. v. Massachusetts 8 Mr. Justice Day 
observed that in the Kansas cases "the business of both complain- 
ing companies was commerce, the same instrumentalities and the 
same agencies carrying on in the same places the business of the 
companies of state and interstate character." 9 The Baltic Case 
involved two corporations each of which was said to be "carrying 
on a purely local business, quite separate from its interstate trans- 
actions." 10 In this case the court sanctioned the imposition of a 
tax on a foreign corporation for the privilege of conducting local 
business, which tax, though measured by total capital stock, could 
not, under the terms of the statute, exceed $2,000. It was impos- 
sible to tell from the opinion just what weight the court gave re- 
spectively to this provision for a maximum and to the fact that 
the local business was separate and distinct from the interstate 
business. But Mr. Justice Day thought it material to mention 
that the "local and domestic business is real and substantial, and 
not so connected with interstate commerce as to render a tax upon 
it a burden upon the interstate business." u 

6 216 U. S. 1, 50, 30 Sup. Ct. Rep. 190 (1910). See 31 Harv. L. Rev. 587. 

6 Ibid. 

7 216 U. S. 1, 37, 30 Sup. Ct. Rep. 190 (1910). See 31 Harv. L. Rev. 591. 

8 231 U. S. 68, 34 Sup. Ct. Rep. 15 (1913). See 31 Harv. L. Rev. 594-96. 

9 231 U. S. 68, 85, 34 Sup. Ct. Rep. 15 (1913). See 31 Harv. L. Rev. 595, note 89. 

10 231 U. S. 68, 86, 34 Sup. Ct. Rep. 15 (1913). See 31 Harv. L. Rev. 595-96, 
note 89. u Ibid. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 723 

It is to be observed that the learned justice said "a tax," and 
did not restrict his comment to the particular tax in question. 
Hence, after the Baltic Case, a state had considerable warrant for 
the inference that taxes on the local business of foreign corpora- 
tions might be measured by their total capital stock, if the local 
business was of a kind that might be easily separated from the 
interstate business, and was not, like the railroad and telegraph 
business, so tied up with the interstate business by joint use of the 
same physical facilities that the abandonment of the local business 
would not proportionately reduce operating costs. But since, in 
addition to the difference between the business involved in the 
Massachusetts case and that involved in the Kansas case, there 
was the further difference in the statutes with respect to the pro- 
vision for a maximum, no state court could be certain that the 
Supreme Court would sanction the measure of total capital stock 
with no maximum limit, even when applied to a local business easily 
severable from an interstate business. The decisions of the Supreme 
Court left the question open, and the opinions of the justices did 
not fill the gap with any distinct announcement. This much, how- 
ever, was clear. The Baltic Case did not overrule the Western 
Union Case. It recognized the authority of the earlier decisions, 
but distinguished the case before it on the two grounds that the 
tax and the business on which it was imposed both differed from 
those involved in the Western Union Case and those following it 12 
in which the states were held to have exceeded their powers. 

The Western Union Case and the Baltic Case gave the state 
courts much food for thought. From the difficulties which beset 
them, it is apparent that the Supreme Court had failed to make 
clear the precise extent to which the Western Union Case had 
qualified the doctrine of prior decisions, and the extent to which 
the Baltic Case limited the inferences which might be drawn from 
the Western Union Case. This obscurity was not cleared up during 
the period in which were decided the state cases to be reviewed. 
It is perhaps too much to say that even now the light shines bright. 
True, on December 10, 191 7, the Supreme Court decided in Looney 



12 Pullman Co. v. Kansas, 216 U. S. 56, 30 Sup. Ct. Rep. 232 (1910); Ludwig v. West- 
ern Union Telegraph Co., 216 U. S. 146, 30 Sup. Ct. Rep. 280 (1910); Atchison, T. & 
S. F. R. Co. v. O'Connor, 223 U. S. 28*, 32 Sup. Ct. Rep. 216 (1912). See 31 Harv. L. 
Rev. s 8 7~94- 



724 HARVARD LAW REVIEW 

v. Crane Co. 13 that a foreign corporation making local and inter- 
state sales within the state could not be required to pay for 
the privilege of conducting local business a fee measured by total 
capital stock with no maximum limit. The case was treated as 
within the doctrine of the Western Union Case, but it was recog- 
nized that special circumstances had excluded the Baltic Case 14 
and others 15 from that doctrine. It may therefore be assumed 
that special circumstances may take other cases out of the doctrine 
of the Western Union Case. Prior to the Looney Case the opinions 
of the Supreme Court had emphasized that every decision of the 
question at issue must depend on its own facts. 16 The existence of 
a general rule was denied. The opinion in the Looney Case, how- 
ever, seems to lay down a general rule that no tax may be measured 
by any elements of value on which a direct tax may not be imposed. 
But this general rule is not applied to taxes on the franchises of 
domestic corporations, 17 and its generality is therefore suspect. 
Not of course that the rule itself is subject to exceptions, but that 
special circumstances may exclude particular cases from coming 
within it. For a complete enumeration of such special circumstances 
we shall have to wait until the Supreme Court has run with preci- 
sion the line between what falls within the doctrine, and what with- 
out. Meanwhile state courts may still seek to differentiate cases 
before them from the Looney Case. It seems unlikely, however, 
that the Supreme Court will deal kindly with any state tax on for- 
eign corporations engaged partly in interstate commerce, if the tax 
is measured by total capital stock without having a fixed limit of a 
reasonable amount. 

The state cases to be discussed are of course to be judged in the 
light of what the Supreme Court had declared before they were 
decided. The two courts which had the greatest difficulty were 
those of Montana and California. With every desire to follow the 
Supreme Court whithersoever it might lead, the supreme courts of 

13 245 U. S. 178, 38 Sup. Ct. Rep. 85 (1917). See 31 Harv. L. Rev. 600-18. 

14 Note 8, supra. 

15 St. Louis S. W. Ry. Co. v. Arkansas, 235 U. S. 350, 35 Sup. Ct. Rep. 99 (1914); 
Kansas City, F. S. & M. R. Co. v. Botkin, 240 U. S. 227, 36 Sup. Ct. Rep. 261 (1916); 
Lusk v. Botkin, 240 U. S. 236, 36 Sup. Ct. Rep. 263 (1916). See 31 Harv. L. Rev. 
594-600. 

16 See 31 Harv. L. Rev. 595, 598, 600. 

17 Kansas City, M. & B. R. Co. v. Stiles, 242 U. S. 111, 37 Sup. Ct. Rep. 56 (1916). 
See 31 Harv. L. Rev. 599-600. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 725 

these two states found the path dimly lit. A review of their wan- 
derings may perhaps shed some additional light on the controlling 
considerations which guided the Supreme Court, and may at the 
same time suggest how the Supreme Court might have indicated 
somewhat more clearly what those considerations were. It will 
appear that the chief cause of the distress under which the Montana 
and California courts labored was the failure to appreciate that the 
Supreme Court was deciding only the particular cases before it, 
and was, according to its professions, influenced by the character- 
istics of the business involved as well as by the provisions of the 
statutes. The fact that recently in the Looney Case the Supreme 
Court appears to be finding a yardstick which will apply indis- 
criminately to all kinds of business, does not require us to forget 
that previously the court did not fix its attention exclusively on 
the language of the statutes. 



The first case to come before the Montana court was Chicago, 
M. & St. P. Ry. Co. v. Swindlehurst, 1 * which held invalid a require- 
ment that foreign corporations should pay fees, graduated accord- 
ing to capital stock, for filing with the designated state officer 
copies of their charter, or of certificates for increase of their capital. 
The complainant was an interstate railroad, chartered by Wis- 
consin, which was desirous of purchasing the property of an inter- 
state railroad chartered by Washington, and carrying on both local 
and interstate business in Montana. Neither the statute nor the 
business could be differentiated from those involved in the cases 
on the Kansas and Arkansas statutes in the Supreme Court. The 
only point of difference is thus stated and dismissed in the opinion 
of the Montana court by Brantly, C. J.: 

"Some effort was made by counsel for appellant to maintain the 
contention that in each of the cases cited the question involved was 
whether the corporations which were already doing business in the 
state should be excluded therefrom; whereas in this case the question 
is whether a corporation shall be permitted to come into the state to 
engage in business. A reading of these cases, however, leads to the 
conclusion that this difference in the situation of the parties cannot 
affect the result." 19 

18 47 Mont. 119, 130 Pac. 966(1913). 19 47 Mont. 119, 126-27, 130 Pac. 966 (1913). 



726 HARVARD LAW REVIEW 

That this interpretation was warranted can hardly be denied. 
Yet it is also true that a state court less willing to accept the 
new doctrine of the Supreme Court might have taken the position 
that, since both Mr. Justice Harlan and Mr. Justice White laid 
stress on the fact that the Western Union Company and the 
Pullman Company had been in the state for a considerable time, 
carrying on all kinds of business, and had acquired property of a 
permanent nature, the cases excusing them from the Kansas and 
Arkansas taxes did not apply to a corporation which was outside 
the state, asking to be let in. So far as the actual decisions of the 
Supreme Court go, the doctrine of the Western Union Case has 
not yet been applied to a foreign corporation still on the threshold. 
In the Looney Case 20 the complainant had been doing business in 
the state for over ten years and had acquired two warehouses in 
the state. The Stiles Case 21 established that the Western Union 
doctrine does not apply to a domestic corporation created after 
the passage of the law objected to. 

If the doctrine of the Western Union Case applies to a foreign 
corporation when first knocking at the door, it would seem that 
there must also be a doctrine that a state cannot exclude from local 
business a foreign corporation seeking to come in to do a combined 
local and interstate transportation business. For it would be absurd 
to permit a state to forbid local business, if it cannot charge what it 
pleases for permission to enter the state to engage in such business. 
It would seem that Mr. Justice Holmes must agree with this, for his 
dissent was based on the converse proposition that it was absurd to 
deny to a state the power to tax local business as it pleases, if the 
state may forbid such business. 22 If the Supreme Court follows the 
Montana court, it should go a step further and declare that a 
foreign corporation, seeking to engage in interstate transportation 
within a state, cannot be prevented from entering to carry on 
domestic commerce, if the conduct of such domestic commerce is 
essential to the satisfactory and economical conduct of interstate 
commerce. 

The Montana statute involved in the Swindlehurst Case came 
before the Montana court again in State v. Alder son.™ The com- 
plainant was the General Electric Company, and the business 

20 Note 13, supra. 21 Note 17, supra. 

22 See 31 Habv. L. Rev. 585-86. M 49 Mont. 29, 140 Pac. 82 (1914). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 727 

which it sought to do in Montana was held to be a "strictly private, 
intra-state business." In the interim between the Swindlehurst 
Case and this case, the United States Supreme Court had de- 
cided the Baltic Case. The Alderson Case is not important for 
the actual point which it decides, for it is based, not on the dis- 
tinction between the Western Union Case and the Baltic Case, 
but upon the fact that the General Electric Company did not 
enter for interstate commerce at all, and upon the rule of law 
that therefore its claim of exemption was foreclosed by Paul v. 
Virginia 24 and Hooper v. California. 25 The Baltic Case was referred 
to as possibly qualifying the rule of Paul v. Virginia to the extent 
that, though the state may entirely exclude a foreign corpora- 
tion seeking to do only local business, it must not do so condition- 
ally, if the condition imposed is bad per se. 26 After quoting from 
the opinion in the Baltic Case, Judge Holloway adds: 

"Whatever may finally be determined to be the extent of state control 
over a foreign corporation situated as relator is, we are satisfied that the 
exaction demanded in this instance does not infringe upon any right of 
this relator which is guaranteed to it by the Constitution of the United 
States, and that the state may rightfully say: You may come into this 
state and engage in local, private business only on condition that you 
pay the fee required under section 165 above. Kehrer v. Stewart, 197 
U. S. 60, 25 Sup. Ct. 403, 49 L. Ed. 663; Allen v. Pullman Co., 191 U. S. 
171, 24 Sup. Ct. 39, 48 L. Ed. 134; Pullman Co. v. Adams, 189 U. S. 
420, 23 Sup. Ct. 494, 47 L. Ed. 877." 27 

From other language in the opinion, it seems that the Montana 
court thought that the Supreme Court meant in the Western Union 
Case to declare that an excise fee on a foreign corporation, doing 
interstate commerce of any kind within the state, was a property 
tax if measured by property, and that in the Baltic Case the 
Supreme Court receded from that position, and held that an 

24 8 Wall. 168 (1869). 

25 155 U. S. 648, 15 Sup. Ct. Rep. 207 (1895). 

26 Since the decision of Looney v. Crane Co., note 13, supra, we know that this 
is the declared doctrine of the Supreme Court with reference to state taxation of a 
foreign corporation manufacturing goods in other states and making local and inter- 
state sales within the state. It is possible, too, that the Supreme Court may in time 
extend its expanding doctrine to foreign corporations doing only intra-state commerce 
within the state. For the Looney Case purported to be based on the due-process clause 
as well as on the commerce clause. See 31 Harv. L. Rev. 603, 613. 

27 49 Mont. 29, 37, 140 Pac. 82 (1914). 



728 HARVARD LAW REVIEW 

excise tax measured by property would not be a property tax. 28 
Speaking for the court, Judge Holloway says: 

"We are unable to appreciate the distinction attempted to be made 
by the Supreme Court of the United States between the Kansas statute, 
considered in Western Union Tel. Co. v. Kansas, above, and held to impose 
a general tax upon all the property of the company, and the statute of 
Massachusetts, considered in Baltic Mining Co. v. Massachusetts . . . 
and held to be a mere excise; but, if we have accurately characterized 
our section 165 above, the latest pronouncement by that court justifies 
the existence of our statute and the method employed for determining 
the amount of the tax. It may be that our legislation is unwise in failing 
to fix a reasonable limit upon the amount to be exacted from any one 
corporation; but, if the authority is lodged in the state to exclude the 
relator altogether or to impose such terms to its admission here as may 
seem expedient, then the amount of the fee affords no tenable ground 
of opposition to the validity of the statute. If the amount demanded 
is more than the local, private business of relator will justify it paying, 
the tax can be avoided altogether by a renunciation of its intention to 
do such business. The state does not seek to compel it to engage in busi- 
ness here, nor does it attempt to collect this fee in the sense that property 
taxes or ordinary debts may be enforced. It merely says to the relator: 
You may engage in local, private business in Montana if you conform to 
the conditions imposed; otherwise you must stay out." 29 

It is possible, however, that the Montana court appreciated one 
of the distinctions between the Western Union Case and the Baltic 
Case without appreciating that it so appreciated it. For through- 
out the opinion it refers to the business of relator as private and 
intra-state. The reference to the fact that the business was private 
distinguishes it from the transportation business which employs 
the same facilities in intra-state and interstate commerce. On the 
other hand, there is evidence that the Montana court thought 
this distinction of no importance. For, in dealing with the conten- 
tion of the complainant in the Alderson Case that the Swindlehurst 
Case had declared section 165 unconstitutional, and that, therefore, 

28 This seems to be a misconception. The Supreme Court did not differentiate the 
two cases on the ground that one involved a property tax, and the other an excise tax, 
but on the ground that one involved an invalid excise tax, and the other a valid one. 
The reasons given why the later Massachusetts excise was valid included the provision 
for a maximum, and the character of the particular business on which the tax was 
imposed. 

29 49 Mont. 29, 34-35, 140 Pac. 82 (1914). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 729 

the secretary of the state was without authority to demand any 
fees thereunder, it conceded that its language in the earlier case 
was not apposite, since it seemed to imply that the fee could not 
be demanded of any foreign corporation, and it adds: 

"To have been technically exact, we should have said in the Swindle- 
hurst case that section 165 does not have any application to foreign 
corporations seeking to engage in interstate commerce in this state. 
This is our holding, and, thus stated, the statute is left intact to apply to 
foreign corporations over which this state has the right to exercise some 
degree of regulation or control." 30 

The Montana court therefore construes the words, "every foreign 
corporation," contained in section 165 so as to apply only to 
foreign corporations not engaged in interstate commerce, under 
the familiar principle that a statute will if possible be so construed 
as to render it constitutional. Thus the Montana statute is assumed 
to be inapplicable to any foreign corporation engaged in any kind 
of interstate commerce within the state. In this the Montana 
court foreshadowed the decision of the Supreme Court in Looney 
v. Crane Co. 31 But the Montana court did not base its belief 
on the failure of the Montana statute to set a maximum to the 
annual charge, as is evident from its declaration that "the amount 
of the fee affords no tenable ground of opposition to the validity 
of the statute." 32 So the Baltic Case is evidently given no effect 
with respect to corporations engaged in interstate commerce. 
There is therefore considerable evidence that the Montana court 
was correct in its assertion that it failed to appreciate the dis- 
tinction between the Western Union Case and the Baltic Case. 

The Montana supreme court was not the only one perplexed 
by the Western Union Case and those following it. In H. K. 
Mulford Co. v. Curry 33 the California supreme court had to deal 
with a statute requiring foreign corporations to pay a fee measured 
by total capital stock for filing with the secretary of state copies 
of certain documents, whose filing was a condition prerequisite 
to doing business in the state. The complaining corporation was 
a manufacturer and seller of medicines with its principal place of 
business in Philadelphia. It maintained a branch house in San 



1 49 Mont. 29, 39, 140 Pac. 82 (1914). 31 Note 13, supra. 
49 Mont. 29, 34, 140 Pac. 82 (1914). M 163 Cal. 276, 125 Pac. 236 (1912 



730 HARVARD LAW REVIEW 

Francisco from which it filled orders from California and neighbor- 
ing states, so that in California it was engaged in both intra-state 
and interstate commerce. The opinion of the court by Judge 
Henshaw states the doctrine of the Western Union and Pullman 
cases 31 without any reference to the kind of business in which the 
corporations there protesting were engaged, except that it was 
both intra-state and interstate commerce. He mentions the fact 
that the Supreme Court decisions were rendered by a bare majority 
of a sharply divided court, and says that the "decision of the case 
at bar was deliberately delayed to note whether any recession 
from the views expressed in those cases would follow from the 
change in the personnel of the court." 35 But instead of a recession, 
he adds, the doctrine was affirmed by an undivided court in Atchison, 
Topeka and Santa Fe R. R. Co. v. O'Connor. 36 And then he says 
of the case before him: 

"The minutest investigation and the most careful consideration fail 
to disclose any ground upon which the case here at bar may be distin- 
guished from those cited. The legal parallelism between this case and 
that of Ludwig v. Western Union Telegraph Co., . . ., is perfect. Both 
corporations were engaged in inter as well as intrastate business. 
Both were so engaged before the passage of the excise law in question." 37 

Then follows a review of the Ludwig Case, 38 and the statement that 
the parallelism between it and the case at bar is so perfect "as to 
render futile any attempt to distinguish them, and thus to save 
the California laws." 39 

The opinion next proceeds to discuss the effect of the Supreme 
Court decisions on other applications of the state statute than the 
one involved in the case before the court. This is prefaced by a 
reference to the "further duty" of the court "in pointing out for 
future legislative action the limitations upon the power of the 
state in dealing with foreign corporations." 40 It is then set forth 
that the principle of the Western Union Case must apply to a 
domestic, as well as to a foreign, corporation engaged in combined 
intra-state and interstate commerce, since, if regulation which is 
unlawful when separately considered cannot be justified as the 

34 Notes 4 and 12, supra. M 163 Cal. 276, 282, 125 Pac. 236 (1012). 

36 Note 12, supra. 37 163 Cal. 276, 282-83, 125 Pac. 236 (1912). 

38 Note 12, supra. 39 163 Cal. 276, 284, 125 Pac. 236 (1912). 

40 163 Cal. 276, 285, 125 Pac. 236 (1912). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 731 

price of one privilege, it cannot be justified as the price of another. 
"The attention of the Legislature is thus directed to the fact that 
the law in question can apply only to domestic corporations nowhere 
engaged in interstate business, and to foreign corporations seeking 
to enter the state solely to do domestic business." 41 

Judge Henshaw next points out that in the Western Union Case 
and the Pullman Case the Kansas statute was held unconstitutional 
under the Fourteenth Amendment as well as under the commerce 
clause. From this he concludes that a state cannot tax a foreign 
corporation engaged solely in domestic commerce by any method 
which results practically in taxing property without the state, 
" and therefore beyond the jurisdiction of the taxing power of the 
state." 42 Thus the Supreme Court is taken to mean that under no 
circumstances can a state exact, even as the price of some privi- 
lege which it might withhold, any [imposition which would be 
improper as a simple tax on property or on an occupation. 

"These constitutional questions thus decided are, as we have pointed 
out, in no way correlated, but are entirely separate and distinct. It is 
but the indulgence of futile and unwarranted speculation to say that the 
Supreme Court of the United States would call in the fourteenth amend- 
ment to the aid of a foreign corporation doing an interstate business to 
overthrow a state tax law, and would not invoke it in the case of a 
foreign corporation engaged in purely domestic business, notwithstanding 
that the tax upon the capital stocks of the foreign corporations (and thus 
the tax upon the property without the jurisdiction of the state) was, in 
both instances, identically the same. Nor can relief be found in a refusal 
to call such a license fee a tax. A state court may call it a fee or an 
exaction or a regulation; but the Supreme Court of the United States 
will call it a tax if, in its effect, it partake of the nature of a tax." 43 

After this decision, the Supreme Court declared in Baltic Mining 
Co. v. Massachusetts^ that foreign corporations engaged in certain 
kinds of business could be subjected to a limited annual excise 
measured by total capital stock for the privilege of engaging in 
domestic commerce, even though such corporations were also 
engaged in interstate commerce. Two years later in Albert Pick 

41 163 Cal. 276, 286, 125 Pac. 236 (1912). 

42 163 Cal. 276, 287, 125 Pac. 236 (1912). 

43 163 Cal. 276, 286-89, I2 S Pac. 236 (1912). 

44 Note 8, supra. 



732 HARVARD LAW REVIEW 

& Co. v. Jordan, 45 the California supreme court again passed on 
the California statute imposing on foreign corporations an annual 
excise measured by total capital stock. The complaining corpora- 
tion manufactured ceramic articles in Chicago. It had a branch 
house in San Francisco, from which sales were made to purchasers 
in California and neighboring states. It was compelled by the 
California court to pay the annual excise measured by its total 
capital stock. Judge Henshaw was well aware that this decision 
violated the advice to the legislature given in his previous opinion 
in the Mulford Case, 46 though the judgment in that case related 
to the original charter fee, and not to the annual excise. The basis 
for the change of doctrine was the intervening decision of the 
Supreme Court in the Baltic Case. 

Judge Henshaw reviews at length the Supreme Court decisions 
prior to the Mulford Case, and states that he and his colleagues 
had concluded from those decisions that "the Supreme Court 
meant and declared, for the indicated reasons, that the method 
of charging a fee upon foreign corporations for the right to do a 
local business on or based on the total capital stock of such 
corporations was forever inhibited. . . ." 47 Reference is then 
made to the dissenting remark of Mr. Justice Holmes, expressing 
his curiosity as to what objection could be raised to a specific tax 
of the same amount as that reached under the computation required 
by the Kansas statute, 48 and answer is essayed as follows: 

" We believed that the answer would be, as above indicated, that it was 
not the amount of the charge which determined the invalidity, but the fact 
that in its form the charge was laid upon property without the taxing power 
of the state, and that to submit to the payment of it in such a form (that 
is, a tax on all the capital stock) would be to force the surrender upon the 
part of the corporations of their well-defined constitutional rights. 49 

"These, then, were some of the conclusions which we drew from the 
decisions of the Supreme Court, and which, with more or less complete- 
ness, we sought to declare in Mulford Co. v. Curry. One part of the 

45 169 Cal. 1, 145 Pac. 506 (1915). 46 Note 33, supra. 

47 169 Cal. 1, 16, 145 Pac. 506 (1915). 48 Quoted in 31 Harv. L. Rev. 594. 

49 169 Cal. 1, 16, 145 Pac. 506 (1915). Continuing, Judge Henshaw says: "Thus, 
if a man who is on his way to church to give a hundred dollars to charity is robbed of 
that hundred dollars by a highwayman, his financial condition is exactly the same 
as it would have been had he carried out his purpose. Yet it will not be said that 
this fact leaves him uninjured and without grievance." 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 733 

judgment of the Supreme Court we conceived to be apodictic, and that 
was that all the capital stock of such a corporation could not be subjected 
to any tax without doing violence to the Constitution of the United 
States, and it was under this conviction that we sought in Mulford Co. v„ 
Curry to enlighten our legislative department as to the danger which 
would attach to all laws basing license fees of a foreign corporation on 
this method of taxation." 60 

But this understanding of the doctrine of the Supreme Court 
was succeeded by confusion after its decision in the Baltic Case. 
Judge Henshaw refers to the reasons given by the Massachusetts 
court for not applying the Western Union doctrine to the Massa- 
chusetts statute and the corporations complaining against it. 
These were (1) the fact that the Massachusetts statute, unlike that 
of Kansas, fixed a maximum to the annual imposition, and (2) the 
further fact that the corporations resisting the law of Kansas 
were common carriers, whose "local business could not be given 
up without impairing their capacity to transact their interstate 
business," 51 while the Massachusetts statute did not apply to 
common carriers nor to corporations engaged solely in interstate 
commerce, "nor yet to corporations carrying on both interstate 
and domestic commerce, whose domestic or intra-state business 
was conducted in such close connection with the other that it could 
not be abandoned without serious impairment of the interstate 
business." 52 

With evident amazement Judge Henshaw notes that the "Su- 
preme Court of the United States adopts without reservation 
the determination of the Supreme Court of Massachusetts that 
this fee is an excise tax as distinguished from a property tax." 53 
He says, however, that "it by no means follows that, being an 
excise tax, this is conclusive that it is not levied upon property." 54 
He does not see how it is relieved from the "condemnation imposed 
upon the Kansas statute for attempting to do the same thing by 
fixing or basing its tax on the total capital stock of the corpora- 
tion." 55 The limitation of the amount exacted in any one year 
seems to him immaterial, since, if "the principle upon which its 
tax is based is a sound one, it may to-morrow increase the amount 

60 169 Cal. 1, 17, 145 Pac. 506 (1915). 51 169 Cal. 1, 18, 145 Pac. 506 (1915O 

52 169 Cal. 1, 19, 145 Pac. 506 (19ft). B3 Ibid. 

54 Ibid. 5B 169 Cal. 1, 20, 145 Pac. 506 (1915). 



734 HARVARD LAW REVIEW 

of the tax to any extent." 56 Nor does Judge Henshaw appreciate 
the force of the distinction between the business of a common 
carrier and that of manufacturing and selling goods. 

"It is true that in the earlier cases the corporations involved were 
common carriers, and the Supreme Court of the United States makes 
mention of that fact in the Dental Case, but it does not say that this 
consideration influenced or was determinative of the controversy. To 
the contrary, it does say that all corporations engaged in interstate 
commerce are under the equal protection of the commerce clause of the 
Constitution, and, indeed, no distinction between them can justly be 
drawn. If it is important that common carriers — the instrumentalities 
by and through which commerce is conveyed — shall be protected 
from unwarranted burdens, it is equally necessary that the owners of 
the commerce to be conveyed should receive a like protection. While 
interstate commerce would unquestionably be vitally impaired if common 
carriers were eliminated, interstate commerce would be totally destroyed 
if the goods, wares, and merchandise embraced within the meaning of 
the word were debarred from interstate and foreign transportation." 57 

The California court concedes that the deprivation of the local 
business of common carriers is "an injury and impairment of their 
business as a whole," 58 but it insists that "this is equally true of 
every commercial corporation likewise engaged in interstate and 
domestic business." 59 Of course in this the California court is 
mistaken, if, by "equally," it means "to the same extent." If 
the S. S. White Dental Manufacturing Company were taxed for 
its local business in Massachusetts so heavily that the local business 
was unprofitable, it might close its local branch, reduce thereby 
its expenses, and then make its Massachusetts sales through 
solicitors from its Philadelphia office, filling from the Philadelphia 
warehouses all orders obtained through such solicitors. Closing 
down the domestic business would increase the interstate business, 
and the interstate business would be immune from state inter- 
ference. If the common carrier gives up local business, it cannot 
accommodate its would-be patrons by carrying them or their 
goods across state lines, for that would not meet their needs. 
Moreover, the abandonment of the local business of a common 
carrier will not be followed by any such proportionate reduction 

56 169 Cal. 1, 20, 145 Pac. 506 (1915). " Ibid. 
68 169 Cal. 1, 21, 145 Pac. 506 (1915). M Ibid. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 735 

in operating costs as ensues from the closing of the local sales office 
of a foreign corporation engaged in manufacture and sales. 

It is because of this failure to recognize the significance of the 
economic integration of domestic and interstate business which 
uses the same facilities for both, and needs nearly as extensive 
facilities for either as for both, that the California court says of 
the opinion of the Supreme Court in the Baltic Case: 

"Again, we fail to perceive how every word of this might not equally 
well have been said in the Western Union Telegraph Company Case, 
thus forcing the irresistible conclusion that the Supreme Court has 
receded from the position which it took, and has abandoned the views 
which it expressed in that and the like cases." 60 

But Judge Henshaw assumes that this interpretation of the Baltic 
Case is incorrect, since he is "confronted in the same opinion 
with the declaration of the court that it has 4 no disposition to limit 
the authority of those cases.'" 61 With becoming modesty and 
pleasing humor he adds: 

"We are constrained to admit our inability to harmonize this language 
and these decisions, though we make haste to add that undoubtedly 
the failure must come from our own deficient powers of perception 
and ratiocination, and for this deficiency it is no consolation to us to 
note that our Brethren of the Supreme Court of Montana are similarly 
afflicted." 62 

The intellectual difficulties of the California court were enhanced 
by their acceptance of the language of the Supreme Court in the 
Western Union and Pullman cases as a declaration of absolute 
and universal principles, when, in reality, that language had par- 
ticular reference to the results of applying the particular statute 
before the court to the particular business of the particular com- 
plainants. It may well be that the judges of the Supreme Court 
must accept some of the responsibility for being misunderstood 
by their brethren in the state courts. Certainly the dictum of 
Mr. Justice Harlan in the Western Union Case, with reference to 
a domestic corporation soliciting orders for goods manufactured 
in other states, 63 would justify the assumption that he, and the 

60 169 Cal. 1, 24, 145 Pac. 506 (1915). 

61 Ibid. 

62 Ibid. Judge Henshaw then quotes the excerpt cited above in note 29. 

63 Quoted in 31 Harv. L. Rev. 591-92, note 71. 



736 HARVARD LAW REVIEW 

three, and possibly, four, judges who agreed with him, were an- 
nouncing the doctrine that no imposition could be justified as the 
price of any privilege, unless the same imposition would be entirely 
proper as a simple property or occupation tax. This is also the in- 
ference to be drawn from the latest declaration of the Supreme 
Court in the Looney Case. 64 But in seeking to understand judicial 
opinions we must not confuse a / 'agon de parler with a ratio decidendi. 
There was enough emphasis put upon the character of the business 
in the Western Union Case to invite any state court to appreciate 
that the broad declarations scattered through the opinions did not 
apply ex proprio vigore to other kinds of business or to modified 
forms of the Kansas statute. The Massachusetts court realized 
this and drew distinctions 65 which were later ratified by the Su- 
preme Court in the Baltic Case. 66 That ratification made it clear 
that the mere flavor of total capital stock would not of necessity 
make an excise on foreign corporations unpalatable to the Supreme 
Court. But even then the Montana and California courts did not 
understand what was incubating. They were searching for a sign. 
They saw recent developments as doctrine and not as a way of ad- 
justment. And as doctrine the decisions exemplified the work of 
Scriabine rather than of Mozart. The Stiles Case 67 and the Looney 
opinion, when heard together, make the dissonance of doctrine 
complete. After the Looney opinion, the courts of Montana and 
California must be pardoned, even if they cannot be exonerated. 
But the pardon, it is to be feared, will afford no more consolation 
to Judge Henshaw of the California court than did the fact that his 
"Brethren of the Supreme Court of Montana [were] similarly 
afflicted." 68 

II 

The supreme court of Idaho, however, did not suffer from the 
same affliction as its neighbors. In Northern Pacific Railway Co. 
v. Gifford,™ handed down after the Supreme Court's decision in the 
Baltic Case, the Idaho court evinced its insight into what was 
going on. The Gifford Case involved a statute imposing on foreign 

64 Note 13, supra. a In the cases cited in note 76, infra. 

66 Note 8, supra. 67 Note 17, supra. 

68 169 Cal. 1, 24, 145 Pac. 506 (1915). The passage is quoted on page 735, supra. 

69 25 Idaho 196, 136 Pac. 1131 (1913). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 737 

as well as domestic corporations, for the privilege of doing local 
business within the state, an annual tax graded in accordance with 
the total capital stock and limited to $150. The complainant was 
a foreign corporation running an interstate railroad which urged 
that its local business was done at a loss instead of a profit. The 
Idaho court ruled that the Idaho statute was "freer from objection 
than the Massachusetts statute" sustained in the Baltic Case, be- 
cause the maximum imposition was so much less. Ailshie, C. J., 
after reviewing the state and federal cases, observed that the court 
was convinced "that the supreme court intended to determine the 
effect of the statute as it will apply in actual practice, rather than 
decide it upon the theory of any apprehended dangers which might 
flow from other similar legislation which might prove more exact- 
ing." 70 It was suggested that if the maximum fee under the Idaho 
statute had been $50,000 instead of $150, the Supreme Court "might 
hold that it unreasonably burdens interstate commerce, although the 
company has the alternative of abandoning its purely interstate 
business." 71 But the fee imposed in the present case was said to be 
"a trifle" and not susceptible of being a burden on interstate com- 
merce. It was sanely observed that, if the domestic business was 
not worth paying a fee of $150 annually, the corporation "will not 
suffer by abandoning that business and confining itself only to its 
interstate business and such business as necessarily attaches and per- 
tains to its interstate traffic. 72 The suggestion that under the state 
constitution "the respondent corporation as a common carrier could 
not decline or refuse to carry on its domestic or intrastate business" 73 
was answered by pointing out that the constitution also provides 
that common carriers are subject to legislative control, and that it 
would be absurd to penalize a corporation for not carrying on intra- 
state commerce, if by reason of its refusal to pay the tax imposed 
thereon it had been forbidden to engage in such commerce. 

Further evidence that the Idaho court appreciated the considera- 
tions which had guided the Supreme Court appears in the following 
comment on a quotation from the opinion of Mr. Justice Day in 
the Baltic Case. 

70 25 Idaho 196, 209-10, 136 Pac. 1131 (1913). 

71 25 Idaho 196, 210, 136 Pac. 1131 (1913). 

72 Ibid. 

73 25 Idaho 196, 210-11, 136 Pac. 1131 (1913). 



738 HARVARD LAW REVIEW 

"The foregoing excerpt reminds one of the impression he has after 
reading the Kansas cases, namely, that the really controlling consideration 
with the great jurist who wrote the majority opinion of the court in those 
cases was the fact that the amount of the excise or license fee laid upon 
the corporations by the statute of Kansas was so exorbitant and unreas- 
onable that the companies would not likely have been able to pay the 
same and would have as an alternative been obliged to abandon their 
local or intrastate business if the statute had been upheld, and that the 
Kansas Legislature was in fact trying to tax the whole property of the 
corporation, and so the court concluded that it amounted to really laying 
a tax upon all the property of the companies, whether within or beyond 
the state, and had the effect of both interfering with interstate commerce 
and taking the property of the company without due process of law. No 
such charge can be justly laid against the Idaho statute. . . . The fee 
charged is a trifle; the maximum that can be charged upon the largest 
corporation which may enter the state being only $150." 74 

Thus the Idaho court saw that the question was one of substance 
rather than of form. Judge Ailshie did not, it is true, make specific 
reference to all the items that go to make up the substance. But 
since the corporation before the court was an interstate railroad, 
it would have been obiter in the particular case to discuss the ques- 
tion whether more favor might be shown to excises on corporations 
making sales than to those on corporations engaged in transporta- 
tion. The maximum set by the Idaho statute was so small that 
the character of the business of the complaining corporation may 
well be disregarded. It is to be anticipated that, if the Idaho statute 
or a similar one comes before the Supreme Court, it will be applied 
to a transportation corporation as well as to a company engaged in 
selling merchandise. But the Supreme Court would certainly in- 
sist that the maximum must be considerably less than the $50,000 
mentioned by the Idaho court. 

If any state should graduate its maximum in accordance with the 
amount of the total capital stock or of the total assets, we should 
approach a situation where the tax was in fact measured by total 
capital or total assets. Yet there is good sense in varying the maxi- 
mum according to the size and business of the corporation on which 
the tax is imposed. It is hardly to be expected that the Supreme 
Court would object to an amendment to the Massachusetts statute 

74 25 Idaho 196, 207-08, 136 Pac. 1131 (1913). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 739 

sustained in the Baltic Case, by which the maximum was reduced for 
corporations having a smaller capital stock than that of the Baltic 
Mining Company or that of the S. S. White Dental Company. If a 
$2,000 maximum removed the stain of a reference to the capital stock 
of corporations having $2,500,000 and $1,000,000 of authorized capi- 
tal respectively, and$io,776,ooo and $5, 71 1,718. 29 of assets, it is hard 
to see how new spots would accrue by making the maximum $1,000 
for corporations having $2,500,000 of assets, and correspondingly 
less for those whose resources were smaller. A court which took 
the contrary position would be insisting that the states not only 
may, as in the Baltic Case, impose proportionately heavier burdens 
on small corporations than on large ones, but that they must do 
so. For such is the necessary result of a rigid limitation on the 
amount of the tax, no matter how large the corporation. Yet, if 
the maximum varies with the size of the corporation, the tax is apt 
to vary with the amount of extra-state property of the several cor- 
porations subjected thereto, and with the volume of their total 
business. The practical situation under such circumstances might 
be substantially identical with that produced by a tax measured by 
total capital, with no maximum, but with an insignificant rate of 
levy. Yet it seems probable that the Supreme Court would apply 
the statute with varying limits, provided all were reasonable, and 
would decline to apply the one which reached the same result by an 
insignificant rate of levy. 

In spite of the well-founded objections to efforts on the part of 
courts to settle questions that are not before them, some tolerance 
might be pleaded for a hankering to propound a series of questions 
to the Supreme Court in the hope of obtaining definitive and 
specific answers. We know that, in determining the validity of ex- 
cises on foreign corporations engaged partly in interstate commerce, 
some maximum is necessary to wash away the sins of a statute that 
casts glances at the corporations' total capital stock. But we do 
not know how high the state may make its maximum. And the 
Supreme Court will have to tell us as the specific cases come before 
it. It cannot well do so with the type of formula brought forward 
in the opinion in the Looney Case. No such conceptual dichotomy 
can minister satisfactorily to a complex situation in which so many 
of the elements are in reality mutually interblended. It is attractive 
to believe that statutes can be divided rigorously into good and 



740 HARVARD LAW REVIEW 

bad by a sharp line of demarcation. But this is to invoke artificial 
simplicity in the presence of actual complexity. The court is not 
entrusted with the function of passing judgment on statutes in 
vacuo or as theses nailed to the wall. Its task is the less exalted 
and more difficult one of deciding whether the result of applying 
a particular statute to the particular state of facts involved in the 
case at bar is consistent or inconsistent with the requirements of 
the Constitution. A statute on the printed page, a statute is, and 
it is nothing more. It is not of necessity either good or bad. 
The court does not pass directly on the constitutionality of stat- 
utes, but on the propriety or impropriety of action taken under 
them. The application of a statute to one situation may give rise 
to problems entirely different from those presented by its applica- 
tion to another. A maximum which saves a tax from imposing an 
appreciable burden on interstate commerce, when levied on one 
corporation, may not, when levied on another. It was a counsel 
of wisdom which the Supreme Court adopted when it declared that 
every case on the subject under consideration must depend upon 
its own facts. The seeming departure from that attitude in the 
Looney Case points to a way of approach that cannot claim the 
same commendation. 

This is not to censure the actual decision in the Looney Case. 
There is much to be said for a flat declaration that the measure of 
total capital stock must be accompanied by a proper maximum limit 
to the annual imposition. There is sense in not undertaking to pass 
judgment on the propriety of each particular rate of levy. But it is 
confusing to be told that, if the measure of the tax includes elements 
which cannot be taxed directly, the existence of the federal system 
is impeached, so long as we know that such measures are upheld in 
excises on domestic corporations, and have reason to infer from the 
Baltic Case that they would be upheld in excises on a foreign cor- 
poration whose capital is not sufficiently large to bring it within 
the shelter of the maximum set to the state's demands. 

The all-embracing utterances of the Supreme Court bristle 
with riddles. Unless the state courts seek for the implications of 
the Looney Case outside of the broad language of the opinion, they 
will find themselves beset with the same difficulties as those which 
puzzled the courts of Montana and California. But the decision of 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 741 

the Idaho court in the Gifford Case 75 shows that those difficulties 
are not insurmountable. The supreme court of Massachusetts 
also was able to grasp that the Supreme Court was feeling its way 
for a practical adjustment, and that its catholic statements were 
put forth as instruments rather than as the all-inclusive final truths 
which by their terms they seemed to declare. The Massachusetts 
decisions in the Baltic and White Dental cases 76 indicated this. 
The two subsequent cases of Marconi Wireless Telegraph Co. v. 
Commonwealth 77 and International Paper Co. v. Commonwealth 78 
confirm it. The Marconi Case involved the application to nine 
foreign corporations of the statute upheld and applied in the Baltic 
Case. The International Paper Case involved this statute and a 
later amendment imposing on foreign corporations an additional 
excise of one one-hundredth of one per cent of the par value of au- 
thorized capital stock in excess of ten million dollars, with no maxi- 
mum limit set. It may well be that, in this latter case, the Massa- 
chusetts court has sanctioned an adjustment which will be upset by 
the Supreme Court. But this need not detract from our satisfac- 
tion that the Massachusetts court has viewed its task as one of 
finding an adjustment, rather than one of setting up categories 
which profess to be mutually exclusive, when in fact the line which 
marks their boundaries is fuzzy, and each category inevitably 
contains certain particulars which lie partly within the other also. 
None of the corporations concerned in the Marconi Case were 
common carriers, unless the Marconi Wireless Telegraph Company 
should be so regarded. That corporation was held to be not 
within the purview of the statute, because it " transacted no business 
of a domestic or local nature, except such as is inseparable from 
and necessarily incidental to its foreign commerce." 79 A similar 
ruling was made as to the business of the Pocahontas Fuel Com- 
pany. Though it had an office in Boston, this office was merely 
the headquarters for salesmen who solicited orders from customers, 
and sent all orders to New York where they must be accepted and 
approved before a sale takes place. 

75 Note 69, supra. 

76 Baltic Mining Co. v. Commonwealth, 207 Mass. 381, 93 N. E. 831 (1911); S. S. 
White Dental Manufacturing Co. v. Commonwealth, 212 Mass. 35, 98 N. E. 1056 (1912). 

77 218 Mass. 558, 106 N. E. 310 (1914). 

78 228 Mass. 101, 117 N. E. 246 (^917). 

79 218 Mass. 558, 568, 106 N. E. 31.0 (1914). 



742 HARVARD LAW REVIEW 

The seven other corporations were all held subject to the tax. 
The Cheney Brothers Company used its Boston office for the 
storage and display of samples as well as headquarters for its sales 
force. The Lanston Monotype Company kept repair parts at its 
branch office in Boston, which were furnished to customers in 
Massachusetts. The test of amenability to the statute which the 
court applies will be apparent from the following quotation : 

"These facts show the transaction of a very considerable local or 
intrastate business as distinguished from its interstate commerce. While 
there may be economies of management or advertising advantages arising 
from it in conjunction with the interstate business of the company, there 
is no necessary or inherent connection between the two. Because the 
interstate commerce may not be profitable except in connection with 
local business does not so interlock the two that they are inseparable. 
The protection afforded by the federal Constitution to interstate com- 
merce against state excise taxation does not go to the extent of permitting 
one engaged in interstate commerce to compete in local business free 
from liability to an excise to the state merely for the sake of greater profit 
or even of making the difference between profit and loss in the business 
as a whole. Plainly this local business of replacing broken parts is con- 
ducted in a manner wholly distinct from the interstate business. The 
distinction is not whether a profit is made by the conjoining and a loss 
suffered by separating the intra-state and the interstate commerce, but 
whether the nature of the business is such that the company is free to 
renounce the domestic business if it chooses and still conduct its inter- 
state commerce." 80 

In an earlier part of the opinion 81 Chief Justice Rugg had 
pointed out that complainants were placing a false reliance on the 
statement from the opinion of the Supreme Court in the Baltic 
Case, to the effect that the local and domestic business of the 
corporations there in issue was "real and substantial." 82 That, he 
says, "is nothing more than a statement that a shadow cannot be 
made the basis of an excise tax. . . , 83 But when the local and 
domestic business exists," he continues, "then an excise may be 
levied. There is nothing to indicate that a comparison between the 

80 218 Mass. 558, 572, 106 N. E. 310 (1914). 

81 218 Mass. 558, 566, 106 N. E. 310 (1914). 

82 231 U. S. 68, 86, 34 Sup. Ct. Rep. 15 (1913). The passage is quoted in 31 Harv. 
L. Rev. 595-96, note 89. 

83 218 Mass. 558, 566, 106 N. E. 310 (1914). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 743 

total business of the company and its local business was intended. 
Such a basis has never before been intimated." 84 Some question 
must attach to this remark because of the succeeding statement 
that the contention of complainant is directly contrary to Ficklen 
v. Shelby Comity. 85 That case was based largely on the authority 
of Maine v. Grand Trunk Ry. Co., 86 and the Maine Case was 
subsequently treated in Galveston, H. & S. A. Ry. Co. v. Texas, 81 
as involving a statute imposing a tax which was partially in lieu 
of a property tax. Moreover, the Western Union Case casts 
considerable doubt upon the present standing of the Ficklen Case. 
The problem of occupation and property taxes will be treated 
later. The Ficklen Case went on the ground that the commerce 
clause set no limitations whatever to the taxation of domestic 
business, and that ground has certainly been since abandoned. 
Chief Justice Rugg may perhaps have some doubts as to the 
authority of the Ficklen Case, for after citing it, he says that if 
such a principle as contended for by complainants exists in refer- 
ence to any facts, "it has no relation to any of the cases at bar." 88 

"The test is whether the foreign corporation transacts domestic 
business substantial in its essence and not by comparison, and reasonably 
susceptible of separation from its interstate commerce. If it does, the 
state can fix its own terms so far as license fee is concerned. 

"The ratio of profits on the domestic business to the license tax is 
an immaterial circumstance. If the license fee imposed is general in 
its operation and is in other respects invulnerable, the mere fact that 
some foreign corporation may not be able to make profits enough to 
meet it does not render the law unconstitutional as to that corporation. 
The opportunity to do business, subject to the protection of our laws 
and with all the advantages which arise from our markets and our 
financial and other resources, is the thing which is made the subject 
of the excise." 89 

The remaining corporations came easily within the test thus 
laid down. The Northwestern Consolidated Milling Company 

84 218 Mass. 558, 566, 106 N. E. 310 (1914). 

85 145 U. S. 1, 12 Sup. Ct. Rep. 810 (1892). 86 Note 3, supra. 

87 210 U. S. 217, 28 Sup. Ct. Rep. 638 (1908). 

88 218 Mass. 558, 566, 106 N. E. 310 (1914). The doubt as to the authority of the 
Ficklen Case is enhanced by Crew Levick Co. v. Commonwealth, 245 U. S. 292, 38 
Sup. Ct. Rep. 126 (1917). 

89 218 Mass. 558, 566-67, 106 N. E. 310 (1914). 



744 HARVARD LAW REVIEW 

had seven agents at its Boston office, who solicited orders for 
flour from Massachusetts retailers, and then turned the orders 
over to Massachusetts wholesalers to fill. The fact that a natural 
result of filling such orders was to increase the complainant's 
interstate sales to the Massachusetts wholesalers was said to be 
immaterial. "It is too remote from the actual business of the 
plaintiff's salesmen to constitute that interstate commerce." 90 
There were also some sales by plaintiff directly from its own local 
stock. The Copper Range Company was a holding company 
transacting no commerce of any kind. It merely received dividends 
from subsidiary corporations, and then paid dividends to its own 
stockholders. It was said that, though "the legal domicile of the 
plaintiff is in Michigan, its substantial home appears to be in this 
state, where its essential corporate faculties are exercised." 91 
The Champion Copper Company owned a mine in Michigan. Its 
sales were made through its New York office. Boston was the 
seat of its financial management. In Boston were the offices of 
the president and treasurer. Five of its directors lived in Massa- 
chusetts, and the directors' meetings were held in that state. The 
court refers to the "interesting question" whether a corporation 
could manage all its interstate commerce in a state and still be 
exempt from a local excise, but holds that this is not the question 
at bar, for the "corporate activities conducted at Boston constitute 
a doing of business which has no direct relation to commerce." 92 

Another of the litigants, the White Company, an Ohio corporation 
manufacturing automobiles in Ohio and owning a garage in Boston, 
conceded that it was doing domestic business in Massachusetts, but 
it objected that the excise on foreign corporations was larger than 
when it was admitted to the state, and that it was therefore denied 
the equal protection of the laws. This claim was based on Southern 
Railway Co. v. Greene, 93 which held that a railroad company which 
had acquired a substantial amount of property of a permanent 
character within the state had become a "person within the juris- 
diction" of the state, and so could not be discriminated against 
in favor of domestic corporations conducting the same kind of 

90 218 Mass. 558, 575-76, 106 N. E. 310 (1914). 

91 218 Mass. 558, 577, 106 N. E. 310 (1914). 

92 218 Mass. 558, 579, 106 N. E. 310 (1914)- 

93 216 U. S. 400, 30 Sup. Ct. Rep. 287 (1910). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 745 

business. The claim of the White Company is dismissed on the 
ground that its property is of a kind readily salable for other 
uses, and is not like railroad property which cannot be advantage- 
ously disposed of if the business is abandoned. This seems a sound 
distinction between the property involved in the principal case 
and that owned by the Southern Railway Company. But a simpler 
ground for dismissing complainant's contention would be that 
the Southern Railway Case involved discrimination between 
foreign and domestic corporations, and not merely an increase in 
taxation. The Supreme Court decisions warrant no doctrine that 
the equal-protection clause prevents a state from increasing its 
taxation on foreign corporations, provided it does not in so doing 
discriminate in favor of domestic corporations. The foundation 
for such claims, when any exists, is the obligation of contracts 
clause, 94 or the due-process clause as interpreted and applied in the 
concurring opinion of Mr. Justice White in the Western Union 
Case, 95 and later adduced by him in the Looney Case. 96 

Ill 

In none of the foregoing cases have the foreign corporations been 
engaged in manufacturing within the state. Their branches within 
the state were for the purpose of disposing of products made in 
other states. Such part of their business as was intra-state in char- 
acter consisted of sales within the state of property previously in- 
troduced. In International Paper Co. v. Commonwealth? 7 however, 
the Massachusetts court had to deal with the rights of a foreign 
corporation engaged in manufacturing within the state. It did not 
appear what proportion of the product manufactured in Massa- 
chusetts was sold to purchasers in that state; but, of all sales to 
purchasers within the state, only fourteen per cent were from a 
Massachusetts mill. The remaining eighty-six per cent of sales to 
Massachusetts purchasers involved transportation from mills in 
other states. Of its twenty-three mills, only one appeared to be 
located within the state. Less than two per cent of its total assets 
of something over $40,000,000 were in Massachusetts. 

94 American Smelting & Refining Co. v. Colorado, 204 U. S. 103, 27 Sup. Ct. Rep. 
198 (1907). 

95 See 31 Harv. L. Rev. 586-87., 96 See 31 Harv. L. Rev. 603, 613. 
97 228 Mass. 101, 117 N. E. 246 (1917). 



746 HARVARD LAW REVIEW 

The tax to which the plaintiff objected was computed by taking 
one one-hundredth of its total authorized capital stock in excess of 
$10,000,000, with no maximum limit. Relying on the cases which 
hold that manufacture is not commerce, 98 the court declared that 
permission to conduct such business might have been entirely with- 
held from a foreign corporation. It is plainly implied that the state 
is free to measure its excise on such a foreign corporation by any 
method it desires. Chief Justice Rugg quoted from Pullman Co. v. 
Adams" the statement that the "company cannot complain of 
being taxed for the privilege of doing a local business which it is free 
to renounce," 100 and added that "this is true even though the re- 

98 United States v. E. C. Knight Co., 156 U. S. 1, 15 Sup. Ct. Rep. 249 (1895); 
Kidd v. Pearson, 128 U. S. 1, 20, 21, 22, 9 Sup. Ct. Rep. 6 (1888); Cornell v. Coyne, 192 
U. S. 418, 428-29, 24 Sup. Ct. Rep. 383 (1904); Hopkins v. United States, 171 U. S. 
578, 594, 19 Sup. Ct. Rep. 40 (1898); Keystone Watch Co. v. Commonwealth, 212 
Mass. 50, 98 N. E. 1063 (1912). 

The Keystone Case was decided by the Massachusetts court before the Supreme 
Court decided the Baltic Case. It applied to a Pennsylvania corporation manufac- 
turing watches in Massachusetts, the statute upheld in the Baltic Case. The opinion 
reiterated the previous interpretation put upon the statute to the effect that it did 
not apply to foreign corporations "engaged in conducting some kind of interstate 
commerce for hire as its principal function with which intra-state business is so closely 
connected that it cannot be given up without serious detriment to the interstate com- 
merce," giving as an illustration the "telephone or telegraph business." The 
ocrporation had a manufacturing plant in Massachusetts worth $1,300,000, at which 
it employed about three hundred and seventy-five persons. Not more than two per cent 
of the output of this plant was sold to Massachusetts purchasers. Over ninety-five 
per cent was sold on orders solicited and accepted outside of Massachusetts. The 
court said that it was obvious "that the activities of the petitioner conducted within 
this Commonwealth are chiefly those of manufacture, and not of commerce." Con- 
tinuing, the opinion observed: 

"The maintenance of the petitioner's plant in Massachusetts is for a distinct de- 
partment of its manufacture. Although manufacture contemplates commerce, that 
is a subsequent stage. Its manufacturing business is entirely separable from the com- 
merce which follows and which is involved in the sale of the product. The petitioner, 
by reason of its several factories located in different states, does not thereby conduct 
a business so unified and interwoven as to be in a position similar to a telegraph or 
telephone company. Its factory here is separable in valuation as appears by the 
statement of facts. It is not a necessity for its interstate commerce nor necessarily 
maintained for use in connection with interstate commerce." 

For a criticism of this way of looking at the relation between manufacture and 
commerce, see pages 747~756, infra. For Supreme Court decisions which qualify the 
Knight and Hopkins cases, supra, see Swift & Co. v. United States, 196 U. S. 375, 
25 Sup. Ct. Rep. 276 (1905), and United States v. Reading Co., 226 U. S. 324, 33 
Sup. Ct. Rep. 90 (1912). 

99 Note 3, supra. 

100 228 Mass. ioi, ns, 117 N.E. 246, 251 (1917). Quoted from 189 U. S. 420. 422. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 747 

ceipts from the local business do not equal the expenses chargeable 
against such receipts." 101 His reliance on Pullman Co. v. Adams 102 
and Allen v. Pullman Co. 103 seems to indicate his conviction that the 
doctrine of those cases was unaffected by the Western Union Case. 104 
Any such position is open to grave doubts. Certainly some foreign 
corporations engaged in domestic and interstate commerce within the 
state may complain of some taxes on the domestic business, though 
they are legally free to renounce that business. The language of 
the opinions in the Western Union Case, and of succeeding opinions 
expressing approval of that case, should have convinced the Mas- 
sachusetts court that any foreign corporation may successfully 
object to any tax on its domestic business which substantially bur- 
dens its interstate business. It might have assumed that the Su- 
preme Court would ascertain whether any tax on domestic business 
burdens interstate commerce by estimating the effect on interstate 
commerce of abandoning the domestic business. It may well be 
that the precedents in effect when the International Paper Case 105 
was decided would not preclude this Massachusetts tax on this 
corporation. But this is not to say that the tax was valid by reason 
of the doctrine of Pullman Co. v. Adams 106 and Allen v. Pullman 
Co., 107 for that doctrine had certainly been discountenanced by the 
doctrine of the Western Union Case. 

The International Paper Case 108 raises the interesting question 
whether the state has more power over a foreign corporation engaged 
in manufacturing within the state than over one engaged in intra- 
state sales. It is true that manufacture is not legally commerce, 109 
and that therefore it is not interstate commerce. But a foreign 
corporation may combine the business of manufacturing and inter- 
state commerce, as it may combine domestic and interstate com- 
merce. The abandonment of manufacturing may burden interstate 
commerce more than would the abandonment of a domestic busi- 
ness which is technically commerce. The state has no more power 
over the domestic manufacturing of foreign corporations than it has 
over their domestic sales or transportation. If its plenitude of 
power over the taxation of the exercise of corporate functions in the 

101 228 Mass. 101, 115, IJ 7 N. E. 246, 251 (1917). 102 Note 3, supra. 

103 Note 3, supra. 104 Note 4, supra. 

105 Note 97, supra. 106 Note 3, supra. 

107 Ibid. m Note 97, supra. 
109 Cases cited in note 98, supra. 



748 HARVARD LAW REVIEW 

business of domestic sales and transportation does not permit it to 
encroach by indirection on interstate commerce, why should it be 
given greater latitude in the taxation of the exercise of those cor- 
porate functions in the business of manufacturing? The question 
in every case should be whether the abandonment of the func- 
tions upon which rests the power to tax would actually burden the 
functions which are immune from state interference. 

It is plain that the abandonment of domestic sales does not bur- 
den the business of making interstate sales to any such degree as 
the abandonment of domestic transportation burdens the interstate 
transportation. We did not know until December 10, 191 7, when 
Looney v. Crane Co. 110 was decided, whether the Supreme Court 
would regard any tax on foreign corporations making local sales 
within the state as an interference with their interstate business. 
Until that decision the Baltic Case m was the only one that touched 
the question; and, in that case, the tax, though measured by total 
capital stock, was limited in amount. It might have been supposed 
that the limitation in amount would have been regarded as unneces- 
sary, in view of the comparatively slight economic integration of 
domestic and of interstate exchange. But, now that the reverse 
turns out to be the judgment of the Supreme Court, it is not to be 
expected that a different attitude will be taken towards taxation 
of foreign corporations engaged in manufacturing within the state, 
merely because manufacturing is not legally commerce. True, the 
opinion in the Looney Case U2 may seem to mark the recrudescence 
of the test of artificial legal distinctions and the abandonment of 
the intervening test of practical results. If this were so, the Supreme 
Court might make use of the legal distinction between manufactur- 
ing and commerce to impute to the state, arbitrary power over 
foreign corporations engaged in manufacture within its borders. 
But the more optimistic view to take of the Looney Case is that the 
Supreme Court had become convinced that it was wiser to dis- 
countenance the unqualified use of the measure of total capital 
stock in excises on foreign corporations engaged partly in interstate 
commerce, and to emphasize its aversion by language so strong 
that state courts would know that it would require the weightiest 
of practical considerations to overcome the presumption of illegit- 
imacy which such a measure creates. Under this interpretation, 

110 Note 13, supra. m Note 8, supra. m Note 13, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 749 

practical considerations still control the decisions of the Supreme 
Court on the question under discussion. But now the practical 
considerations are not necessary to create the presumption of illegit- 
imacy. The presumption stands unless it can be shown from the 
circumstances of the particular case that the apprehended inter- 
ference with interstate commerce will not materialize. If this 
analysis of the attitude of the Supreme Court is well founded, it is 
not likely that the legal affinity or remoteness of commerce and 
manufacturing would influence the Supreme Court in deciding 
whether it would look more favorably on the Massachusetts tax 
on the International Paper Company than on the Texas tax on the 
Crane Company. To save the former from the excommunication 
visited on the latter, it would be necessary to show that there was 
substantially less economic integration between the various activi- 
ties of the International Paper Company than between those of the 
Crane Company. 

Just what view the Massachusetts court takes of this question 
is not wholly clear. Chief Justice Rugg says that the "local manu- 
facture of paper is disconnected with the interstate business of the 
petitioner except as an artificial relation has been established by the 
petitioner," 113 and that they "have no inherent connection one 
with the other." 114 This might be taken to mean that the two kinds 
of business could be divorced from each other without serious loss 
to the interstate business. But against the inference that this is 
what the Chief Justice has in mind is the fact that he cites cases 
holding that Congress cannot control manufacture, 115 and that the 
states are not precluded from controlling it because of the inten- 
tion of the manufacturer to put his product into the channels of 
interstate commerce. 116 

From a business standpoint there is certainly nothing "artificial" 
in combining the business of manufacturing with that of the sale 
of the product in interstate trade. The lack of any "inherent con- 
nection" between the two would not be apparent to a man of affairs 
unversed in legal niceties. Nothing is more natural than that a 
corporation which manufactures paper should also sell it. It is 
natural that many consumers will dwell in other states than the one 

113 228 Mass. 101, 112, 117 N. E. 246, 250 (1917). u4 Ibid. 

115 The Knight Case and the Hopkins Case, cited in note 98, supra. 

116 Cornell v. Coyne, note 98, supra; Kidd v. Pearson, note 98, supra. 



750 HARVARD LAW REVIEW 

in which the manufacture takes place. It is natural that the loca- 
tion of the mills should be influenced by the place where raw mate- 
rials and motive power are best available. And the donor of the 
sources of pulp and power was not particularly mindful of state lines. 
The mills will seek the waterfalls. Yet under the Massachusetts 
doctrine the mills outside the state will increase the tax on the exer- 
cise of corporate functions within the state. If the tax is too great 
for the domestic manufacturing to bear, the corporation may leave 
the state and supply Massachusetts purchasers from its mills in 
other states. 

It may be urged that this withdrawal from local manufacturing 
would impose no burden on interstate commerce. But suppose 
other states follow the lead of Massachusetts and impose on the 
exercise of corporate functions within their borders similar excessive 
burdens which make the corporation desist from manufacturing. 
How then will it supply its Massachusetts customers? The com- 
bined effect of such statutes in different states would impose serious 
burdens on interstate commerce. It would forbid unity of owner- 
ship and management of mills in different states. It might require 
that mills be less advantageously located. It would increase costs 
of production, by complicating the purchase of raw materials and 
their distribution among the mills in different states. If the state's 
taxing power over domestic manufacturing is unlimited, the states 
together may compel consumers to seek their supplies from foreign 
countries. It is difficult to believe that the Supreme Court would 
ever sustain state taxes on foreign corporations engaged in manu- 
facturing within their borders and in other states and selling a large 
portion of the combined product in interstate trade, if such taxes 
actually resulted in substantial burdens on interstate commerce in 
the manufactured product. 

At first glance Kidd v. Pearson m might seem authority for the 
proposition that no burden on manufacturing could by any possi- 
bility be a regulation of interstate commerce. That case allowed a 
state to forbid the manufacture of liquor even though the liquor 
was intended to be shipped out of the state. It is thus declared that 
a state may through its police power crush a necessary antecedent 
to interstate commerce. But this was before the Western Union 
Case. 118 A different view was taken in West v. Kansas Natural Gas 

u7 Note 98, supra. m Note 4, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 751 

Co. 119 with regard to the attempt of Oklahoma to prevent the ex- 
portation of natural gas from the state. The power of the state over 
its highways and over the right of eminent domain was adduced 
in support of the statute, but Mr. Justice McKenna quoted with 
approval a statement from the Circuit Court of Appeals of the 
eighth circuit to the effect that "no state can by action or inaction, 
prevent, unreasonably burden, discriminate against, or directly 
regulate, interstate commerce or the right to carry it on." 120 Mr. 
Justice Holmes was among those who dissented, thus suggesting 
that the division of opinion related to the question whether the 
state could use its conceded powers to accomplish by indirection 
what it could not do directly. The logic of the Western Union Case 
clearly restrains state burdens on any kind of intra-state business 
which in plain fact amount to substantial regulations of interstate 
commerce. The legal separability of the subject taxed and the sub- 
ject with reference to which the amount of the tax is determined 
is no longer controlling. The Western Union Case shifted the issue 
to one with respect to the facts as to the substantiality of the burden 
on the subject which is immune from the power of the state. 

Viewing the situation as it was when the Massachusetts court 
decided the International Paper Case, 121 it is to be remembered 
that the United States Supreme Court had declared that it would 
look through form to substance and would judge each case accord- 
ing to its own facts. It might therefore have been anticipated that 
the Supreme Court would in each case regard the actual burden 
imposed by the tax in question on the interstate commerce in ques- 
tion. This would require it to take account of the rate of levy as 
well as of the measure to which that rate is applied. It was not, 
however, declared that this would be done. It was settled that 
the measure of total capital stock was proper for taxes on the fran- 
chises of domestic corporations, but improper for taxes on foreign 
corporations engaged in transportation. The law with respect to 
other foreign corporations was uncertain. It was clear that a reason- 
able maximum would cure the evil lurking in the measure of total 
capital stock, but the Supreme Court had yet to pass judgment on 
the use of such a measure with no limitation to the annual imposi- 

119 221 U. S. 229, 31 Sup. Ct. Rep. 564 (1911). 

120 221 U. S. 229, 262, 3 1 Sup. Ct. Rep. 564 (191 1). 
m Note 97, supra. 



752 HARVARD LAW REVIEW 

tion. The Massachusetts supreme court, however, took the posi- 
tion that the absence of a maximum is immaterial, at least in excises 
on foreign corporations engaged in local manufacturing. It declares 
specifically that, under the doctrine of Pullman Co. v. Adams, 122 
it is not open to the International Paper Company to urge "that 
the excise is ' unduly great having reference to the real value ' of the 
property of the petitioner within this Commonwealth, or to the 
amount of domestic business transacted here." m Another reason 
given why the contention was not open in the particular case is 
that the record does not show the amount of the domestic business 
conducted within the Commonwealth or the real value of the prop- 
erty located therein. But Chief Justice Rugg adds that, even "if 
it be assumed that that question is open to the petitioner and that it 
must be decided on this record, it cannot be said that the excise is 
excessive." 124 The tax of $5,500 sustained in the case is said to be 
less than twice the annual exaction for certain classes of liquor 
licenses. The petitioner is said to have "extraordinarily large finan- 
cial resources." And the justification for basing the amount of the 
tax on property, ninety-eight per cent of which is without the state, 
is thus expressed: 

"It cannot be presumed that it may not be worth more to such a large 
corporation than it would be to a small one to be permitted to go into the 
local markets and compete for local business as a domestic manufac- 
turer." 125 

Doubtless this is correct. But can it be presumed that it is worth 
fifty times as much for this corporation to manufacture paper within 
the state as it would be if it manufactured paper only within the 
state? Chief Justice Rugg continues: 

"We know of no principle of law which requires the conclusion that a 
license fee of that amount is unduly or unreasonably great to a corpora- 
tion of such large capital as the petitioner, for the privilege of admission 
to the local markets of this Commonwealth for the transaction of an intra- 
state business in the manufacture and sale of an undisclosed quantity of 
paper of undisclosed value and out of which an undisclosed profit is 
realized." 126 



122 Note 3, supra. m 228 Mass. 101, 115, 117 N. E. 246, 251 (1917). 

124 228 Mass. 101, 116, 117 N. E. 246, 251 (1917). 

125 228 Mass. 101, 116, 117 N. E. 246, 252 (1917). 126 Ibid. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 753 

This may be true enough, so far as a specific tax of $5,500 is con- 
cerned. Before the Looney Case m it might have been supposed to 
be true also with respect to a tax measured by total capital stock in 
excess of $10,000,000 where the rate of levy is only one one-hun- 
dredth of one per cent. But if the rate were to be raised to five per 
cent or ten per cent — as, under the doctrine of the Massachusetts 
court, it might be — the practical question would be entirely 
different, and, it is submitted, the legal one should be also. 

The Supreme Court had declared that every tax is to be judged 
by its actual effect on interstate commerce and had intimated that 
this effect is to be determined with reference to the results of paying 
the tax or of abandoning intra-state business to avoid such payment. 
To tax a foreign corporation engaged in domestic manufacturing, 
$150,000 or $300,000 a year because it has a lot of mills outside the 
state, where under the same statute it would be taxed nothing if it 
had no mill except one or more in the state worth less than $10,000,- 
000, would certainly burden the method of doing business which 
combines manufacturing in various states with sales among the 
several states. It is not unworthy of notice that this section of the 
Massachusetts statute, which applies only to corporations whose 
capital stock exceeds $10,000,000, seems designed for the express 
purpose of reaching corporations with manufacturing plants in 
several states, since many, if not most, of the corporations having 
manufacturing plants only within the state will have a capital of 
less than $10,000,000. 

The Massachusetts court had every reason to assume that the 
Supreme Court had thoroughly accepted and digested the realistic 
attitude which it announced in Western Union Telegraph Co. v. 
Kansas 128 and the later cases 129 which were distinguished from that, 
and that therefore the Supreme Court would disallow a tax under 
this Massachusetts statute if the rate were increased to five or ten 
per cent. Before the Looney Case, the Massachusetts court might 
have expected that its decision in the International Paper Case 
would have been sustained by the Supreme Court, but it had ample 
warning that any decision sustaining the tax would have been put 
on more restricted grounds than those announced in the opinion of 
Chief Justice Rugg. Now that the opinion of Chief Justice White 

127 Note 13, supra. m Note 4, supra. 

129 Cases cited in notes 8 and 15, supra. 



754 HARVARD LAW REVIEW 

in the Looney Case makes a general principle out of what had previ- 
ously been merely a guide for forming a practical judgment in each 
specific case, it is not to be expected that the single fact that the 
complaining corporation manufactures as well as sells within the 
state will be regarded by the Supreme Court as sufficient to exclude 
the International Paper Case from the doctrine of the Looney Case. 
There is good reason to believe that the Supreme Court will insist 
that a reasonable maximum is a necessary ingredient in any statute 
making any reference to total capital stock in prescribing the amount 
of an excise on foreign corporations engaged partly in interstate 
commerce. 

The Massachusetts court, however, was not alone in sustaining 
a tax on a foreign corporation engaged in domestic manufacturing, 
where the measure adopted was the total capital stock with no pro- 
vision for a maximum. The supreme court of Tennessee in Atlas 
Powder Co. v. Goodloe 130 relied on the Baltic Case to support such a 
tax, without adverting in the opinion to the significance of the 
absence of any provision for a maximum in the Tennessee statute. 
The amount imposed was $1,500 on an authorized capital stock of 
$5,000,000. The Tennessee assets were $305,945.11, and the assets 
in other states were $6,000,000. There was manufacturing in Tenn- 
essee and in other states, sales in car-load lots from other states to 
Tennessee, and also sales from Tennessee to other states. Just what 
weight the court gives to the fact that there was domestic manu- 
facturing is not clear. It is pointed out that neither of the two 
corporations complaining in the Baltic Case "owned a factory in 
Massachusetts, but each had a local warehouse where local sales 
were made." m The situation before the Tennessee court is referred 
to as follows: 

"One important feature in the case at bar is that it [sic] is engaged in 
manufacturing black gunpowder at its factory at Ooltewah, in this State, 
and it also has six storage magazines where explosives are kept. It also 
has its places in this State in a number of cities where local sales are made. 
It occurs to us that any part of this local business is of such character as 
to render the complainant liable to the payment of this charter tax, or 
tax on its right to enter the State to do intra-state business. Certainly 

130 131 Tenn. 490, 175 S. W. 547 (1915)- 

131 131 Tenn. 490, 516, 175 S. W. 547 (1915)- 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 755 

the manufacturing business in this State and the operation of storage 
magazines are so far separated from the interstate sales of explosives that 
there can be but little difficulty in the conclusion that the right of the 
state to impose this tax is clear, and we so hold." 132 

This does not definitely declare that local manufacturing is more 
remote from interstate commerce than are local sales, yet it permits 
the inference that the Tennessee court had some such distinction in 
mind. On the other hand, earlier in the opinion, it was said that 
the complainants in both the Baltic Case and the principal case 
"could have omitted the local business if they saw proper, and thus 
separated the local business from the interstate commerce." 133 By 
contradistinction the Pullman Company and Western Union Tele- 
graph Company were said to be "public service corporations" 
which "were bound to accept local business." 134 If this means that 
the doctrine of the Western Union Case is based on the fact that 
the complainant was under a legal duty not to abandon intra-state 
commerce, it is obviously incorrect. It is, moreover, inconsistent 
with the implication of an earlier statement of the Tennessee court 
to the effect that it was claimed on behalf of the companies involved 
in the Western Union and Pullman cases " that their business and 
facilities for doing business were so intermixed that a tax upon the 
company was necessarily a burden upon interstate business, and it 
was so held by a majority of the court." 135 This and other state- 
ments in the opinion make clear that the Tennessee court appre- 
ciated that it was on the ground of the economic, and not the legal, 
inseparability of local and interstate business that the Western 
Union Case was decided. 

While both the Massachusetts court and the Tennessee court 
attach importance to the fact that the corporations whose plaints 
they rejected were engaged in manufacturing within the taxing 
state, the opinions give reason to infer that both courts might have 
reached the same decision had the local business been wholly mer- 
cantile. To the extent that they assumed that this was established 
by the decision of the Supreme Court in the Baltic Case, 136 they 
were in error. The Baltic Case left the question an open one, and 
the opinion, taken as a whole, contained nothing inconsistent with 

132 131 Tenn. 490, 516-17, 175 S. W. 547 (1915). 

133 I3I Tenn. 490, 516, 175 S. W. 547 (1915). 134 Ibid. 

135 131 Tenn. 490, 510, 175 S. W. 547 (1915). 136 Note 8, supra. 



756 HARVARD LAW REVIEW 

the subsequent decision in the Looney Case. The Looney Case, 137 
of course, will require the reversal of the Massachusetts and Tenn- 
essee decisions, unless the Supreme Court should regard the dis- 
tinction between manufacture and sales as sufficient to exclude 
these state decisions from the "controlling principle" announced in 
the opinion in the Looney Case. 

A somewhat different phase of the problem is presented by Gen- 
eral Ry. Signal Co. v. Commonwealth, 138 decided by the supreme 
court of appeals of Virginia on January 13, 1916. This case in- 
volved the power of the state over a foreign corporation engaged 
in performing a contract within the state which involved equipping 
a railroad with safety devices. It appears that the corporation in 
question based its complaint before the state corporation commis- 
sion wholly on the ground that it was engaged entirely in interstate 
commerce, and was therefore beyond the taxing power of the state. 
The commission decided this point against the corporation, on the 
authority of Browning v. Waycross, m which sustained a municipal 
license tax of $25 on agents or dealers "engaged in putting up or 
erecting lightning rods within the corporate limits." The Virginia 
court of appeals adopts the opinion of the state corporation com- 
mission on this point. In this it was clearly correct. Plainly the 
Signal Company did some business within the state which was not 
interstate commerce, and therefore it was not wholly immune from 
the taxing power of the state. As Chief Justice White observed in 
the Lightning Rod Case, 140 the construction work done within the 
state "involved no question of the delivery of property shipped in 
interstate commerce, or of the right to complete an interstate com- 
merce transaction, but concerned merely the doing of a local act 
after interstate commerce had completely terminated." 141 Whether 
the Chief Justice was wholly warranted in an earlier statement that 
"such business was wholly separate from interstate commerce" 142 
is perhaps another question. The answer to it has some bearing on 
the measure which the state may adopt for determining the amount 
of its tax on this local business. 

137 Note 13, supra. 138 118 Va. 301, 87 S. E. 598 (1916). 

139 233 U. S. 16, 34 Sup. Ct. Rep. 578 (1914). 

140 Note 139, supra. 

141 233 U. S. 16, 22-23, 34 Sup. Ct. Rep. 578 (1914). 

142 233 U. S. 16, 22, 34 Sup. Ct. Rep. 578 (1914)- 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 757 

This question was raised when the Signal Company appealed 
from the corporation commission to the state court, and insisted 
that, even if it were subject to taxation because engaged partly in 
intra-state commerce, the state was nevertheless imposing an un- 
constitutional burden on interstate commerce by basing the amount 
of the imposition on the total capital stock. The opinion of the 
Virginia court on this point is as follows : 

"In support of this contention, which we think is without merit, the 
appellant relies upon cases involving the right of the state to impose a 
license tax upon public service corporations engaged in both interstate 
and intra-state commerce within the state, which announce the well- 
settled doctrine that a state cannot lay a tax upon interstate commerce 
in any form. 

"These cases have no application to the present case. Here the defend- 
ant is a commercial corporation carrying on a purely local and domestic 
business quite separate from their [sic] interstate commerce transactions. 
Under such circumstances the state has the right to prescribe the condi- 
tions upon which such a corporation may do its intra-state business, 
provided it lays no burden upon its interstate business. This question is 
disposed of by the case of Baltic Mining Co. v. Massachusetts, 231 U. S. 
68, 34 Sup. Ct. 15, 58 L. Ed. 127, which holds that: 

"'Where a foreign corporation carries on a purely local business separ- 
ate from its interstate business, the state may impose an excise tax upon 
it for the privilege of carrying on such business and measure the same 
by the authorized capital of the corporation.' 

"There is no error in the order appealed from, and it is affirmed." m 

Thus the Virginia court disregards the fact in the Baltic Mining 
Case that the annual imposition under the Massachusetts statute 
could not exceed $2,000. The statement by the Virginia court of 
the holding in the Baltic Case is a quotation from the headnote in 
the official edition of the Supreme Court reports. That headnote, 
however, was unwarranted by the opinion of the Supreme Court, 
since it was specifically pointed out that all the facts in the case were 
material, and one of the facts was the $2,000 maximum. Whether 
the Supreme Court would uphold the Virginia court in sustaining 
the tax on the Signal Company should depend on the judgment it 
would pass on the degree of interrelation between the construction 
done by the corporation in Virginia and the interstate shipment to 
Virginia of the materials there to be affixed. 

143 118 Va. 301, 312-13, 87 S. E. 598 (1916). 



758 HARVARD LAW REVIEW 

It is evident that, if Virginia is permitted to measure its tax by 
total capital stock, foreign corporations with large capital will be 
discriminated against in favor of their foreign and domestic com- 
petitors whose capital is less. The Virginia method of measurement 
might in many instances enable local concerns to underbid their 
larger rivals in other states. If the performance of the contract in- 
volved no interstate commerce, this favoritism would be impeccant, 
if Horn Silver Mining Co. v. New York 144 is still law. But where 
the materials to be affixed within the state would be brought by 
foreign contractors from without the state, the Horn Case would 
not be controlling. The case would then be within the "general 
principle" announced in the Looney Case. The legal separability 
of the activity taxed from the interstate commerce instrumental 
thereto would seem to afford no sensible ground for permitting an 
exaction which, "intrinsically and inherently considered," is beyond 
the power of the state. 

No exception can be taken to the statement of the Virginia court, 
above quoted, that, if the local business is quite separate and dis- 
tinct from the interstate commerce transactions, "the state has the 
right to prescribe the conditions upon which such a corporation 
may do its intra-state business, provided it lays no burden upon 
its interstate business." The "if" and the "provided" safeguard 
the statement from attack. But the application of the statement 
to each particular case requires consideration of the degree of eco- 
nomic separation between the local and the interstate business, and 
of the question whether the tax does lay a burden on interstate 
commerce. 

Very likely the tax in the particular case was not unduly burden- 
some on interstate commerce. The authorized capital of the Signal 
Company was $5,000,000, and the tax was $1,000. The contracts 
which it was performing in Virginia called for the payment of $214,- 
040. It is not to be supposed that a foreign corporation would be 
deterred from seeking a $200,000 contract by the imposition of a 
tax which is only one-half of one per cent of its gross return. But 
if the work to be done called for the payment of only $5,000 or $10,- 
000, it is not likely that a foreign corporation with $5,000,000 of 
authorized capital would submit a bid. The Virginia statute bars 
large foreign corporations from making small contracts to be per- 

144 143 U. S. 305, 12 Sup. Ct. Rep. 403 (1892). See 31 Harv. L. Rev. 613. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 750 

formed within the state. To the extent to which such corporations 
would perform those contracts by shipping materials in interstate 
commerce, the loss thereof prevents interstate commerce from 
taking place. 

It may readily be perceived that it would be unduly vexatious, 
both to litigants and to the Supreme Court, to take to that high 
tribunal every dispute which might arise under the Virginia statute. 
The confusion and uncertainty which would arise if each case de- 
pended on its own facts is only too apparent. Such considerations 
doubtless influenced the writer of the Looney opinion in adducing 
"general principles" in support of the decision, rather than deciding 
the particular case on its particular facts. The possibility of evil 
with which the Virginia statute is pregnant seems sufficient to war- 
rant the establishment of a general rule that an unbridled measure 
of total capital stock is vicious in all cases where it is applied to a 
foreign corporation which to an appreciable degree combines 
interstate commerce with its other activities within the state. In 
many instances the evil would not be averted by limiting the tax to 
$2,000 or to $1,000. 

To a considerable extent analogous evils are possible in similar 
taxes on foreign corporations whose construction work within the 
state might be wholly unrelated to any interstate transportation. 
Foreign corporations of any considerable magnitude would have to 
be assured of a fairly large volume of business within the state before 
they could wisely make a contract for work therein. Excises on 
foreign corporations, measured, not by the amount of work done 
within the state, but by the wealth of the corporation doing it, must 
in plain fact tend to elevate state lines into hurdles to impede the 
course of interstate business. The Supreme Court's reference to 
the due-process clause, in addition to the commerce clause, in the 
Western Union and Looney cases, may well be an entering wedge to 
the overruling of Horn Silver Mining Co. v. New York 145 and to the 
declaration that the local business of foreign corporations, whether 
connected with interstate business or not, must be taxed according 
to the amount of the business, and not according to the resources of 
the corporation doing it. 

Wherever a state bases the amount of its tax on values which 
lie beyond its borders, it is emulating the example of the hard man 

145 Note 144, supra. 



760 HARVARD LAW REVIEW 

of the parable, and seeking to reap where it sowed not, and gather 
where it has not strawed. Its constitutional right' to do this was 
long ago sanctioned by the declaration of Chief Justice Marshall 
that the power to tax involves the power to destroy. It has taken 
Marshall's successors near a hundred years to break the spell of 
his apothegm. But now that this has been accomplished, the way 
is open to face anew the problem of the limits of state taxation, 
and to abandon artificial criteria in favor of distinctions that hug 
the facts. This has been done in passing judgment on taxes on 
foreign corporations engaged partly in interstate commerce. And 
it has been strongly hinted that similar results will be reached 
under the due-process clause, and that therefore foreign corpora- 
tions engaged solely in intra-state business will be relieved from 
taxes which are disproportionate to the business taxed. The con- 
ditions under which business is done by foreign corporations today 
are substantially different from those of the period when sanction 
was first given to the doctrine that the state has unlimited taxing 
power over foreign corporations not engaged in interstate commerce. 
The nation-wide organization of industry and commerce, and the 
enormous capital of the corporations whose business spans the 
continent, make the measure of total capital stock a most in- 
equitable one for each state in which some fraction of that busi- 
ness is done. The actual menace may not be great, since large 
corporations may, by creating subsidiaries for operation in each of 
the several states, see to it that existing laws do not multiply 
exactions on the same economic interest. But this way of escape 
gives further evidence of the ineptitude of the measure of total 
capital stock for taxes on foreign corporations. It would be a 
sensible doctrine that the states must measure their taxes by 
property or business which they protect, and not by wealth which 
has its situs elsewhere. There is indeed more reason to restrain a 
state from taking toll from property or business within the bound- 
aries of its neighbors, than to forbid it to reap a benefit from 
the interstate commerce which takes place within the area where 
its authority obtains. 

rv 

In all of the cases thus far considered, the excise taxes on foreign 
corporations have been measured by some or all of their capital 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 761 

stock. But the West Virginia statute involved in Baldwin Tool 
Works v. Blue 146 measured the excise on foreign corporations by 
their total receipts within the state, including those from interstate, 
as well as from intra-state, commerce. From a reference to the bill, 
it appeared that the case involved several corporations, but the 
opinion does not give their names or the kind of business in which 
they were engaged, with the exception of one domestic corporation 
which was a holding company. It is evident from other language 
in the opinion that some of the other corporations were foreign to 
West Virginia. It is evident too that some of these foreign cor- 
porations were engaged in business in other states as well as in West 
Virginia, for the court states and rejects a contention made with 
reference to the provision in the statute for ascertaining the annual 
income of such corporations which shall be deemed to have been 
earned within the state. The material provisions of the statute are 
as follows: 

"Every corporation . . . now or hereafter organized under the laws 
of this state, or under the laws of any other state or government and en- 
gaged in any business whatsoever in the state of West Virginia, shall pay 
an annual special excise tax for the privilege of carrying on or doing busi- 
ness in the state of West Virginia, equivalent to one-half of one per centum 
upon the entire net income of such company, received by it from all 
sources during the year, on business transacted and capital invested in 
this state, as hereinafter set forth. . . . 147 

"It is the intention of this chapter to assess the tax imposed thereby on 
the net income as defined therein of the corporations . . . arising from 
business transacted and capital invested in this state. Every such com- 
pany having capital invested in its business in this state only, shall pay 
the tax upon its entire net income ascertained as herein provided; and every 
such company, except an insurance company, engaged in business and 
having capital invested and transacting business both in and out of 
the state, shall pay the tax upon that part of its entire net income 
which bears the same proportion to its whole net income that the assessed 
value for purposes of taxation of its assets and property within the state 
bears to the total assessed value of all of its assets and property in the 
jurisdictions where it is located." 148 

The complainants objected to any reference to property in, or re- 
ceipts from, other states in determining the receipts deemed to have 
been earned within the state,^ The court's answer is brief: 

146 240 Fed. 202 (1916). 147 240 Fed. 202, 204 (1916). M8 240 Fed. 202, 204-05 (1916). 



762 HARVARD LAW REVIEW 

"A careful consideration of the provisions of the statute as respects 
this question leads us to the conclusion that the method employed for 
ascertaining the amount of the tax which the corporation is required to 
pay is perhaps as fair, as a general rule, as any scheme that could be de- 
vised for that purpose. Undoubtedly the state of West Virginia has the 
right to base its tax upon the return of the entire net income in the re- 
spective states, and to apportion the amount of the income thus ascer- 
tained as a means of ascertaining the net income subject to taxation by 
the state." 149 

The authorities cited do not support the proposition. The Baltic 
Case 150 did not involve any reference to receipts. United States 
Express Co. v. Minnesota 151 used receipts as an aid in valuing prop- 
erty and not in assessing an excise tax. Maine v. Grand Trunk 
Railway Co., 152 it is true, involved an excise tax on a foreign corpora- 
tion, but the court later reinterpreted it and placed it on the ground 
that the tax in question was in the nature of a property tax. 153 The 
cases permitting the valuation of property within a state to take 
account of receipts from interstate commerce will be dealt with in a 
succeeding section of this discussion. They rest on grounds which 
do not apply to excise or occupation taxes. 

There is no doubt that a state tax directly on receipts from 
interstate commerce is invalid. 154 And a tax on railroads "equal 
to" a percentage of receipts has been held to be as vicious as a 
tax levied on receipts eo nomine. 155 It must therefore be open to 
serious question whether the Supreme Court will allow a state 
to include in the measure of a tax on the privilege of a foreign 
corporation to engage in domestic business, any receipts which 
are from interstate commerce. 156 It has been explicitly held that 



149 240 Fed. 202, 206 (19 1 6). 15 ° Note 8, supra. 

151 223 tj. S. 335, 32 Sup. Ct. Rep. 328 (1012). 152 Note 3, supra. 

153 Galveston, H. & S. A. Ry. Co. v. Texas, 210 U. S. 217, 226, 28 Sup. Ct. Rep. 638 
(1908). 

154 Philadelphia & Southern Mail S. S. Co. v. Pennsylvania, 122 U. S. 326, 7 Sup. 
Ct. Rep. 1118 (1887). 

155 Galveston, H. & S. A. Ry. Co. v. Texas, note 153, supra. 

156 In the Galveston Case, note 153, supra, Mr. Justice Holmes observed that the 
tax in question "is merely an effort to reach the gross receipts, not even disguised by 
the name of an occupation tax, and in no way helped by the words 'equal to.'" 
This hint of the possibility of disguising the tax by calling it an "occupation tax" 
seems to have animated the Texas legislature to amend the statute and dub the tax 
an "occupation tax." There was enough in a name to persuade the court of civil 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 763 

such a measure cannot be applied to a so-called "revenue tax" on 
a railroad corporation. 157 On the other hand in Ficklen v. Shelby 

appeals of Texas to hold in State v. Houston Belt & Terminal Ry. Co. (Tex. App.), 
166 S. W. 83 (1914), that the tax, being not on interstate receipts but on an occupation, 
and only measured by receipts, was not a regulation of interstate commerce. This 
case was criticized in a note in 28 Harv. L. Rev. 93. It was reversed by the supreme 
court of Texas in Houston Belt & Terminal Ry. Co. v. State (Texas), 192 S. W. 1054 
(191 7). The Texas supreme court found that that tax could not be sustained as one 
on "going value" as property of the complainant, since "the assessment of its property 
for ad valorem taxation under the general laws included the value which it had as 
property of a going concern." 

The law with regard to taxes on occupations is still unsettled. Ficklen v. Shelby 
County Taxing District, notes 85, supra, and 158, infra, has not yet been overruled, 
though the reasoning on which it was decided has been shaken by later opinions of the 
Supreme Court. In Commonwealth v. Crew Levick Co., 256 Pa. St. 508, 100 Atl. 952 
(1917), it was held without discussion that a mercantile tax may be measured by the 
whole volume of business, including receipts from foreign commerce. The decision 
of the Pennsylvania court was reversed by the United States Supreme Court in Crew 
Levick Co. v. Commonwealth, 245 U. S. 292, 38 Sup. Ct. Rep. 126. The opinion of the 
court endeavored to distinguish the Ficklen Case, on the ground that the Pennsylvania 
tax in question was not " an occupation tax, except as it is imposed upon the very 
carrying on of the business of exporting merchandise." It was, however, stated that 
the Ficklen Case "is near the border line" and "has been deemed exceptional." The 
authority of the Ficklen Case is narrowly limited, if not directly shaken, by this 
latest decision on the subject, though this decision leaves it still possible for the Su- 
preme Court to permit taxes on taxable occupations to be measured in part by re- 
ceipts not themselves directly taxable. Yet on the whole the court's attitude 
towards the Ficklen Case seems to be that of de mortuis nihil nisi bonum. In Postal 
Telegraph Cable Co. v. City of Mobile, 179 Fed. 955 (1909), an injunction was granted 
against the enforcement of an ordinance imposing a flat fee of $1,000 on each telegraph 
company doing business in the city, while in Postal Telegraph Co. v. City of Portland, 
228 Fed. 254 (1915), a tax of $75 per quarter for the privilege of doing local business 
in the city was sustained. The complainant alleged that the intra-state receipts did 
not equal the expenses properly chargeable to intra-state business, but the court an- 
swered that the question of the reasonableness of a tax was largely legislative in character. 
In Postal Telegraph Cable Co. of Norfolk v. Norfolk, 118 Va. 455, 87 S. E. 555 (1916), 
the Virginia court sustained a tax of $500 per year plus $1 per pole and $1 for every hun- 
dred feet of conduit. In State v. Northern Express Co., 76 Wash. 636, 136 Pac. 1160 
(1913), however, a tax measured by gross receipts within the state including receipts 
from interstate commerce was held invalid. The chief reason given was that the 
company under the constitution of the state was not free to renounce its local busi- 
ness. For a different attitude towards such a provision in a state constitution, see 
Norhern Pacific Railway Co. v. Gifford, note 69, supra. 

It is to be anticipated that before long the Supreme Court will be called upon to 
tell to what extent the doctrine of the Western Union Case applies to taxes on occu- 
pations and to declare whether or not Ficklen v. Shelby County Taxing District, 
supra, is still law. The problem is complicated by the fact that many municipal or- 



157 Meyer v. Wells Fargo & Co., 223 U. S. 298, 32 Sup. Ct. Rep. 218 (1912). 



764 HARVARD LAW REVIEW 

County Taxing District 158 it was held that commission dealers 
who desired to do a combined intra-state and interstate business 
could be required to pay a percentage of receipts from all kinds 
of business. If this case can still stand, it must be either (1) be- 
cause the state has more power to take toll from interstate 
commerce through taxes on occupations than through taxes on 
corporate privileges, which is unthinkable, or (2) because of a con- 
trolling distinction between the character of the commission busi- 
ness and that of the transportation business. A commission 
merchant, unlike a railroad, may abandon intra-state business 
without serious results to the per-transaction costs of the interstate 
business. To a lesser degree the same is true of a foreign corporation 
engaged in local sales. If it gives up this business to escape burden- 
some taxation, it may reduce operating costs by curtailing office 
and warehouse expenses, and it may still furnish customers from 
stock in other states. But the abandonment of mining or manu- 
facturing in the state will seriously affect the interstate business 
of the company. 

It is worthy of note that in two of the cases following the Western 
Union Case 159 the Supreme Court has called attention to the 
practical distinction between excise taxes measured by property 
or capital stock and those measured by receipts. 160 When the tax 

dinances impose specific taxes, or measure their exactions by the number of miles of 
wire or the number of poles within the municipal limits, though these [facilities are 
used for interstate as well as for local commerce. It seems to be settled that the fact 
that the local business is unremunerative does not render it immune from taxation. 
Williams v. Talladega, 226 U. S. 404, 416-17, 33 Sup. Ct. Rep. 116 (1912). This case 
involved a specific tax of $100. The tax was held invalid because the ordinance 
made its payment a prerequisite to doing any business whatever, but the court de- 
clared that it would have been valid if imposed only on local business exclusive 
of that done for the federal government. It is also to be anticipated that specific 
taxes on occupations must either be negligible in amount, or must bear some reason- 
able relation to the value of the business subject to taxation. Some of these occupa- 
tion taxes can doubtless be saved by being regarded as taxes on intangible property. 
In this case they may be measured in part by receipts from interstate commerce. 
Adams Express Co. v. Kentucky, note 166, infra. 

158 Note 85, supra. 

159 Note 4, supra. 

160 St. Louis S. W. R. Co. v. Arkansas, 235 U. S. 350, 363-64, 35 Sup. Ct. Rep. 99 
(1914): "The tax, as will be observed, is not in any wise based upon the receipts of 
the company from interstate commerce, either taken alone or in connection with the 
receipts from its intra-state business. Since, therefore, the amount of the imposition 
is not made to fluctuate with the volume or the value of the business done, we are 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 765 

is measured by property or by capital stock, it is not increased 
by an increase in the volume of interstate commerce." When the 
tax is measured by receipts, it is increased by an increase in the 
volume of interstate commerce. The economic result of this 
increase of taxation dependent upon an increase of interstate com- 
merce is to increase pro tanto the cost to the corporation of con- 
ducting interstate commerce. This is exactly the kind of burden 
which the states are forbidden to impose directly and which the 
Western Union Case forbids them to impose by indirection. The 
only practical difference between the direct and the indirect ap- 
proach to the receipts would seem to be that, to block the indirect 
approach, it might be required to appear that the abandonment of 
the enterprise on which the tax is levied would materially injure 
the enterprises which afford the receipts by which the amount of 
the tax is in part determined. 

From the aspect of the effect on interstate commerce of a with- 
drawal from local business in order to escape the tax on that 
business, mining and manufacturing are more closely akin to 
transportation than is the business of local sales. Interstate sales 
of West Virginia products must cease if West Virginia mills and 
mines close down. The abandonment of the domestic business 
would involve a serious diminution in the value of the property 
devoted to such business in the state, since its earning power is 
enhanced by the fact that the business of shipping across state 
lines is united with the business of mining and manufacturing. 
Much of the business of the country is most economically con- 
ducted by corporations which combine manufacturing with shipping 
across state lines. No state tax should be allowed which would 
require corporations, in order to escape from burdens on interstate 
commerce, to divorce the ownership and management of different 
kinds of business which cannot be practically or economically 
separated in fact. 

The requirement of such separation, or the alternative of sub- 
mission to a tax which is a burden on interstate commerce, cannot 
be regarded solely from the standpoint of the corporation which 

relieved from those difficulties that arise where state taxes are based upon the earnings 
of interstate carriers, . . ." 

See also the passage quoted from Kansas City, F. S. & M. R. Co. v. Botkin, 240 
U. S. 227, 335, 36 Sup. Ct. Rep. 261 (1916), in 31 Harv, L. Rev. 598. 



766 HARVARD LAW REVIEW 

unites the business of interstate sales with that of manufacturing. 
It must be' regarded also from the standpoint of the consumers 
in other states, since the effect of burdening the interstate com- 
merce of the corporations would be to increase the cost to con- 
sumers. The combination of these different businesses may, it 
is true, give interstate corporations power for evil as well as for 
good. But the prevention of the evil is for Congress and not for 
the states. And if interstate corporations do not bear their fair 
share of the tax burden, this too is for Congress to remedy rather 
than for the states. 

If the interests of the corporations were all that were in issue, 
West Virginia might urge with force some of the distinctions 
between mining and manufacturing on the one hand, and trans- 
portation on the other. As the transportation business is neces- 
sarily conducted, the same property is used for both interstate 
and domestic commerce, but the receipts can be attributed re- 
spectively to each kind of commerce. In the case of mining and 
manufacturing companies which ship their products across state 
lines, the property itself, with the exception of that part devoted 
to office purposes, is employed only for local business. Moreover, 
since all receipts come from sales, the company, by making no 
sales within the state, may so conduct its business that there are 
no receipts from local business, even though such business con- 
tributes mainly to the earnings. The state might therefore urge 
that the corporation, since it chooses to combine local business in 
such a way that no receipts are allocated to the local business, 
cannot complain that the only method of measuring an excise 
tax by receipts must necessarily include within the measure receipts 
from interstate commerce. 

There would be great force in this contention, if the state, in 
losing the power to measure the excise by receipts, were debarred 
from any legitimate revenue. But the result of denying to the 
state the power to measure its excise tax on local business by 
reference to receipts is still to leave open to the state the adoption 
of a measure which regards as a basis the proportion of capital 
stock represented by property within the state, 161 or which regards 
the total capital stock, provided there is a satisfactory limit set 

191 St. Louis S. W. R. Co. v. Arkansas, note 160, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 767 

to the maximum imposition. 162 And excises on corporations 
engaged in mining and manufacturing might also be measured by 
the actual value of the products extracted or created within the 
state. This power of the state was specifically sanctioned in 
Missouri K. &° T. Ry. Co. v. Meyer. 163 The complaining interstate 
railroad in that case protested against an Oklahoma excise on 
persons or corporations engaged in mining within the state, on 
the ground that the coal mined by said railroad was not sold but 
was used by it for its locomotives engaged in interstate commerce. 
In dismissing the contention the court said: 

"The coal produced from mines by the plaintiff first has its situs, 
and the production occurs, wholly within the state. If the tax should 
be regarded as levied upon property, it would not be objectionable on 
account of its use in interstate commerce. But if it was levied upon the 
production of the coal, it cannot be held invalid as a restraint or burden 
upon interstate commerce, because it attaches in advance of any use of 
the coal in such commerce, and it is too indirect in its effect thereon." 164 

Certainly the mining operations were taxable. The same is 
true of manufacturing operations within the state. If the state 
measures its exaction by the fruits of the mining or manufacturing, 
without seeking to tap the profits attributable to the commercial 
transactions of making sales for delivery in other states, no ob- 
jections can be raised. But the state goes beyond this when it 
adopts the measure of total receipts. Though the books of a 

162 Baltic Mining Co. v. Massachusetts, note 8, supra; Lusk v. Botkin, note 15, 
supra. 

163 204 Fed. 140 (1913). 

164 204 Fed. 140, 144 (1913). Another point in the decision is interesting in view 
of the situation created by the recent assumption of federal control over the railroads. 
Some of the mines from which the coal was taken were owned by Indian tribes. The 
railroad leased the same, paying royalties for their use and conducting its operations 
under the supervision and direction of the Secretary of the Interior. Judge Cotteral 
observed that, " if this tax were an ad valorem tax upon the coal produced from the 
mines, it would be valid because the exemption adhering to it in the mines would 
terminate on its removal, upon the general principle that taxation of property is 
valid after the status which exempts it no longer exists." But the tax was said to be 
not upon property but upon the pursuit of mining. "If the tax be sustained," con- 
tinued the court, "it seems clear it might be extended by legislation to the limit of 
depriving the leases of all value, and of frustrating the exercise of the federal power." 
The question to be settled was said to be " whether the tax is sufficiently direct in its 
bearing upon the leases to bring it into conflict with such agency." Without adduc- 
ing specific argument, the court found, the bearing of the tax on the federal agency to 
be sufficiently direct to require its collection to be enjoined. 



768 HARVARD LAW REVIEW 

corporation may not indicate what is made from mining or manu- 
facturing, and what from the succeeding sales, the two stages are 
separable; and some estimate may be made of the proportion of 
the total returns to be allocated to the extractive or creative process. 
This estimate had to be made in Missouri K. & T. Ry. Co. v. 
Meyer, 165 where the producer was also the consumer. When a 
corporation unites the business of mining or manufacturing with 
that of making sales in other states, the activities without the 
state must usually enable it to get more for its product than what 
that product would bring if sold at the mill or mine. Unless some 
deduction is made from the receipts from sales to purchasers in 
other states, the state in which manufacture takes place is taking 
toll from interstate commerce. 166 

165 Note 163, supra. 

166 In considering whether taxes on franchises of foreign corporations may be 
measured in whole or in part by receipts from interstate commerce, a distinction must 
be drawn between a franchise to act as a corporation, and what is commonly termed 
a "special franchise" to occupy the public streets, which is possessed by corporations 
engaged in some form of transportation or communication. Such so-called special 
franchises are property. Owensboro v. Cumberland Teleph. & Teleg. Co., 230 U. S. 58, 
33 Sup. Ct. Rep. 988 (1913); Boise Artesian H. & C. Water Co. v. Boise City, 230 U. S. 
84, 33 Sup. Ct. Rep. 997 (1913). It would seem, therefore, that in assessing their value 
for purposes of taxation, account may be taken, under the doctrine of United States 
Express Co. v. Minnesota, 223 U. S. 335, 32 Sup. Ct. Rep. 211 (1912), of the total 
receipts to which their enjoyment gives rise, including receipts from interstate com- 
merce. Such has been the decision of several state courts. Phillipsburg Horse Car 
R. Co. v. State Board of Assessors, 82 N. J. L. 49, 81 Atl. 1121 (1911); State v. Wells, 
Fargo & Co., 38 Nev. 505, 150 Pac. 836 (1915); Illinois Cent. R. Co. v. Mississippi 
Railroad Commission (D. C. S. D. Miss.) 229 Fed. 248 (1914), semble; People v. State 
Board of Tax Com'rs, 125 N. Y. Supp. 895 (1910); People ex rel. Commercial Cable 
Co. v. State Board of Tax Com'rs, 166 N. Y. Supp. 62 (1917); People ex rel. N. Y. C. & 
H. R. R. Co. v. Priest, 206 N. Y. 274, 99 N. E. 547 (1912), semble. These two last cases 
hold also that the propriety of determining the receipts deemed to be the product of 
the special franchise by taking a proportion of receipts earned in various states, 
depends on the facts in each case. See note 180, infra. 

The validity of an assessment on these special franchises as property is conditioned 
of course on the fact that their value is not included in the assessment of other property 
taxes levied on the corporation. King County, Washington v. Northern Pacific Ry. 
Co., 196 Fed. 323 (1912). See also note 156, supra. 

State statutes which by their terms seem to impose franchise taxes may be inter- 
preted by the Supreme Court as levying, not "a true franchise tax," but "merely a 
property tax upon intangible property." Adams Express Co. v. Kentucky, 166 U. S. 
171, 17 Sup. Ct. Rep. 527 (1897), discussed in Louisville & N. R. Co. v. Greene, 244 
U. S. 522, 544-45, 37 Sup. Ct. Rep. 683 (191 7). This last case, and also Illinois 
Central R. Co. v. Greene, 244 U. S. 555, 37 Sup. Ct. Rep. 697 (1917), consider inter- 
esting questions respecting the proper method of determining what proportion of the 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 769 

The questions raised by the West Virginia statute are most 
inadequately dealt with in Judge Pritchard's opinion in Baldwin 
Tool Works v. Blue. 167 The point in issue was not whether it was 
"fair" to the corporation to pay a tax measured by its receipts, 
but whether such a tax was a regulation of interstate commerce. 
Many taxes which are fair enough, so far as the taxpayer is con- 
cerned, are regulations of interstate commerce, and are therefore 
to be imposed, if at all, by Congress rather than by the states. But 
there is strong ground to believe that the measure adopted by 
West Virginia for the tax on corporations doing business in several 
states was far from fair. 

A foreign corporation doing business only in West Virginia 
could base its objection to the excise under consideration only 
on the commerce clause. But a corporation doing business in 
several states might have other grounds on which successful 
resistance might be placed. It might urge that within the doctrine 
of Mr. Justice White's opinion in the Western Union Case, West 
Virginia was in effect taxing property and business beyond the 
jurisdiction and thus denying it due process of law. It is to be 
noted that the West Virginia statute declares that "it is the in- 
tention of this chapter to assess the tax imposed thereby on the 
net income . . . arising from business transacted and capital 
invested in this state." 16S It thus disavows the intention to assess 
the tax on business not transacted in the state. But in the case of 
corporations doing business in several states, the statute bases 
the amount of the tax, not on the income from business actually 
done within the state, but on a proportion of the total income 
derived from business in all the states. This proportion is ascer- 
tained by applying to that total, the ratio between (1) the assessed 
value, for purposes of taxation, of the assets and property of the 
corporation within the state, and (2) the total assessed value of 
all its assets and property in all the states in which it does business. 

The suitability of this ratio for determining what proportion of 
the receipts from business in all the states arises from business 
within West Virginia depends upon two assumptions: (1) that the 

total intangible property of a railroad running through several states is to be regarded 
as located within the taxing state. 

167 Note 146, supra. 

168 240 Fed. 202, 204 (1916). Quoted on page 761, supra. 



770 HARVARD LAW REVIEW 

assessed value for purposes of taxation in each state is the same 
proportion of the actual value of the property in that state; (2) 
that the earnings from business within each state bear the same 
ratio to the total earnings in all the states as the actual value of 
property within the state bears to the actual value of property in 
all the states. 

In the case of certain corporations the first assumption will be 
found to be opposed to the facts. This is because in some other 
states the assessment values are not identical with the actual 
values. In some states, personal property employed in manu- 
facturing is exempt from taxation. In Massachusetts, as Chief 
Justice Rugg points out in the International Paper Case, 169 a 
domestic corporation is not taxed locally for its personal property, 
but such property "is taken into account in ascertaining the value of 
its franchise upon which it pays an excise tax." 17 ° The result of 
such discrepancies between actual and assessed values inl other 
states, while assessments in West Virginia correspond to actual 
values, is to allow West Virginia to extract additional revenue 
from the corporation because some other state, for the encourage- 
ment of manufacture, exempts certain property, or substitutes 
some other mode of taxation for ad valorem taxes on property. 

The assumption that earnings in each state are proportioned 
to the value of property in that state is likewise unwarranted. 
This would not necessarily be true if all earnings were the result 
of the use of property. The property in West Virginia might be 
unproductive in any given year without reducing in that year its 
assessed value. An increase in the productivity of property in 
other states, without a corresponding increase in the productivity 
of property in West Virginia, would increase the amount of the 
tax in West Virginia. Since, if West Virginia were allowed to 
measure its taxation by a proportion of the total earnings in all 
the states, other states might a fortiori measure their taxes by the 
actual earnings in those states, the receipts taken as the measure 
of taxation in all the states might be greater than the total actual 
earnings. 

A further vice in the assumption under consideration is that 
not all the earnings in all the states are the product of the use of 
property. The earnings from other states may be the fruit of 

169 Note 97, supra. 170 228 Mass. 101, 114, 117 N. E. 246 (1917). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 771 

business unconnected with the use of property. That business 
may consist entirely of interstate sales. A leasehold interest and 
a clerical force may be all that is necessary to carry it on. The 
receipts from such business would be added to the total of which 
West Virginia fixes a proportion as the measure of its tax, but the 
absence of any considerable amount of property in states other 
than West Virginia would make the ratio between property in 
West Virginia and that in all the states a most inadequate one for 
the determination of what proportion of the total receipts shall 
be deemed to be earned from business in West Virginia. 

It is clear, therefore, that the ratio applied by West Virginia 
to total receipts in all the states is little adapted to the professed 
end of ascertaining the receipts properly attributable to business 
in West Virginia. Its application to corporations doing business 
in several states, under the conditions suggested in the three fore- 
going paragraphs, would result in a more serious burden on inter- 
state commerce than would the selection of the receipts actually 
derived from business in West Virginia. It would tax such corpora- 
tions more severely than corporations doing business only in West 
Virginia, and would therefore penalize the interstate organization 
of business. 

Unless the Supreme Court has abandoned its canon that every 
decision on the subject under consideration is to be based on the 
facts of the particular case, such facts in respect to the business 
and property and taxation of any foreign corporation as indicate 
that the West Virginia ratio does not serve its professed end, 
would be material in determining whether the tax was a regulation 
of interstate commerce or a taking of property without due process 
of law. And if the Supreme Court has discarded its realistic out- 
look, it has done so in favor of a rigid formula that any tax which 
would be invalid, if levied directly on what it is measured by, 
is invalid although levied on something else properly subject to 
taxation. 

There are no authoritative precedents on the propriety of West 
Virginia's method of determining the receipts from business within 
the state for the purpose of measuring the amount of an excise 
tax, because the recent decisions m have denied to the states the 
power to measure excise taxes by receipts which include receipts 
171 Cases cited in notes 153 and 157, supra. 



772 HARVARD LAW REVIEW 

from interstate commerce. The only cases in which reference to 
receipts which include receipts from interstate commerce has been 
allowed in determining the amount of a tax imposed by the state, 
are those in which the state is seeking to value property within 
the state. 172 In those decisions we rind that the court sustains the 
application of a ratio to a total only when the result may fairly 
be presumed to measure the actual value of that part of the total 
which is in the taxing state. 

In Fargo v. Hart,™ the state of Indiana sought to value the Indi- 
ana property of an interstate express company by taking that part 
of the total value of property in all the states which the mileage 
over which the company did business in Indiana bore to the total 
mileage over which the company did business in all the states. On 
the complaint of the company, the state was not allowed, in fixing 
the total to which the ratio was to be applied, to include assets 
of the express company not used in the express business, and which 
were therefore not properly distributable throughout all the states 
on a mileage basis. The inclusion of such assets in this total was 
held to be not merely a case of over-valuation, but an assessment 
made upon unconstitutional principles and a taxation of property 
beyond the jurisdiction of the state, and the imposition of an un- 
constitutional burden on commerce among the states. The fol- 
lowing quotation from the opinion of the court shows the principle 
underlying the decision: 

"It is obvious however that this notion of organic unity may be made 
a means of unlawfully taxing the privilege, or property outside the 
State, under the name of enhanced value or good will, if it is not closely 
confined to its true meaning. So long as it fairly may be assumed that 
the different parts of a line are about equal in value a division by mileage 
is justifiable. But it is recognized in the cases that if for instance a rail- 
road company had terminals in one State equal in value to all the rest 
of the line through another, the latter State could not make use of the 
unity of the road to equalize the value of every mile. That would be 
taxing property outside of the State under a pretense. Pittsburg, Cin- 
cinnati, Chicago £f St. Louis Ry. v. Backus, 154 U. S. 421, 431; Western 
Union Telegraph Co. v. Taggart, 163 U. S. 1, 23. The same principle 
applies to personal property which the State would not have the right 

172 United States Express Co. v. Minnesota, note 166, supra, and cases cited 
therein. 

173 193 U. S. 490, 24 Sup. Ct. Rep. 498 (1904). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 773 
to tax directly. Adams Express Co. v. Ohio State Auditor, 165 U. S. 194, 

227; S. C, 166 U. S. 185, 222, 223." 174 

The case of Fargo v. Hart 175 was quoted with approval in Meyer 
v. Wells Fargo & Co. 176 That decision involved an excise tax 
measured by a proportion of gross receipts. A corporation doing 
business in several states was required to pay a tax "equal to such 
proportion of said per centum of its gross receipts as the portion 
of its business done within the state bears to the whole of its busi- 
ness." m There was, however, in the statute a proviso for fixing 
a different proportion, if it "more fairly represents the proportion 
which the gross receipts of any such public service corporation for 
any year within this state bear to its total gross receipts." 178 This 
proviso was not before the court for consideration, because the 
reference to receipts was held entirely invalid; but, in considering 
the possible contention that the tax was to be regarded as a property 
tax, the court made the following comment : 

"The plaintiff's receipts are largely from commerce among the States, 
and it also receives large sums as income from investments in bonds 
and land all outside the State of Oklahoma. So that it is evident that 
if the tax is what it calls itself it is bad on the former ground, and that 
whatever it is it is bad on the latter. Fargo v. Hart, 193 U. S. 490. In 
that case the tax was proportioned to mileage, and it was held that it 
could not be sustained when, although purporting to be a tax on property, 
it took into account, in order to increase proportionately the value of 
the mileage within the State, valuable property outside of it. The same 
principle would apply to a property tax measuring the total property 
by the total gross receipts increased by the special outside sources of 
income and taxing a proportion of this total fixed by the ratio of business 
within the State to that outside." 179 

In these two decisions the vice in the method of determining 
what part of the total property or business was within the state, 
lay in the selection of an excessive total rather than in the selection 
of an excessive ratio. Manifestly, however, an excessive ratio 
would have the same vice as an excessive total. 180 

174 193 U. S. 490, 499-500, 24 Sup. Ct. Rep. 498 (1904). 

176 Note 173, supra. 175 Note 157, supra. 

177 223 U. S. 298, 299, 32 Sup. Ct. Rep. 328 (1912). 

178 223 U. S. 298, 299-300, 32 Sup. Ct. Rep. 328 (1912). 

179 223 U. S. 298, 300, 32 Sup. Ct. Rep. 328 (1912). 

180 A number of cases hold that the taxpayer is not entitled to insist on the applica- 
tion of the mileage ratio to determine what proportion of its total earnings are to be 



774 HARVARD LAW REVIEW 

It may therefore be taken as established that the application of 
the unit rule for the purpose of determining what part of a total 
of taxable value in several states may be regarded as within the 
jurisdiction of the taxing state, is valid only where the relation 
of the ratio to the total is such that the result may fairly be pre- 
sumed to represent the taxable value within the state. A complain- 
ant is entitled to a diminution of the total or of the ratio, upon 
proof that the total includes values not properly apportionable in 
all the states by the ratio selected, or upon proof that the ratio is 
not a proper method of apportioning the total. 

Moreover, it is important to note that, in valuing property, the 
unit rule is legitimate only where the total property may properly 
be regarded as a unit. In the case of railroad and telegraph com- 
panies, the unit is a unit of physically connected property. In 
respect to the express business the unit has been declared to be 
one of "use and management." 181 This is the farthest that the 

taken as the measure of the value of a special franchise to use the highways of the 
state, when such special franchise is taxed as property. In People ex rel. N. Y. C. & 
H. R. R. Co. v. Priest, 206 N. Y. 274, 300, 99 N. E. 547 (1912), the New York court of 
appeals said: 

"Any comparison of track or passenger mileage necessarily spreads the earnings 
over the mileage, without taking into account the value of a franchise at a particular 
place to increase the earnings of the system of road with which it is connected. A 
particular franchise is frequently of important value in connection with a railroad 
system as a means of obtaining and retaining business." 

In People ex rel. Commercial Cable Co. v. State Board of Tax Com'rs, 166 N. Y. 
Supp. 62 (1917), the relator thought its franchise in the city of New York should be 
valued by. applying to total earnings the ratio of the mileage in the city to the total 
mileage, including that of its trans-oceanic cables, but the court thought otherwise. 
In dismissing the contention, Judge Pendleton said: 

"Where the mileage of the telegraph lines, within the city, is small as compared 
with the total mileage, but the terminal property in the city is the means of reaching 
the central point, from which business emanates and to which it converges, a com- 
parison of the mileage of the special franchise with the total mileage cannot in the 
nature of things be an accurate basis for determining what proportion of the total 
net earnings should be allocated to the terminal property." 

It is plain that in many cases a mileage ratio or a ratio of assessed value of property 
will be inept for determining what proportion of total receipts earned in several states 
shall be taken as the earnings within one of those states. The mileage or the property 
in one state may be more or less productive than the same amount of mileage or 
property in another state. It seems clear from the decisions, that neither the state nor 
the taxpayer can insist on some arbitrary ratio which can be shown to be in fact 
ill-adapted to the professed purpose in hand. See West Shore R. Co. v. State Board 
of Assessors, 82 N. J. L. 37, 81 Alt. 351 (1916). 

181 Adams Express Co. v. Ohio, 165 U. S. 194, 222, 17 Sup. Ct. Rep. 305 (1897). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 775 

court has gone in sustaining the application of the unit rule to the 
valuation of property. It would be going still farther to apply 
the unit rule to a corporation not doing the same kind of business 
in all the states in which it operates. The cases which require a 
modification of the unit rule in valuing property, require at the 
least an analogous modification in valuing a privilege granted to a 
corporation by one state which is essentially different in respect 
to the kind of business and its income-producing power than are 
the privileges granted to the same corporation in other states. 

V 

From the foregoing review, it appears that, in the interim between 
the Baltic Case 182 and the Looney Case, 183 the power of a state to 
measure excises on foreign corporations by their total capital stock 
has been considered by the courts of Montana, 184 California, 185 
Massachusetts, 186 Tennessee, 187 and Virginia. 188 Only the Montana 
court saw any impropriety in applying this measure to corporations 
combining some form of interstate commerce, other than trans- 
portation or communication, with the local business which made 
the corporation subject to the taxing power of the state. 189 By. 



182 Note 8, supra. 

183 Note 13, supra. 

184 In State v. Alderson, note 23, supra. 

185 In Albert Pick & Co. v. Jordan, note 45, 

186 In International Paper Co. v. Commonwealth, note 97, supra. 

187 In Atlas Power Co. v. Goodloe, note 130, supra. 

188 In General Ry. Signal Co. v. Commonwealth, note 138, supra. 

189 The decision of the federal district court of the northern district of Texas in 
Crane Co. v. Looney, 218 Fed. 260 (1914), does not appear to except that court from 
the above statement. The opinion indicates that the court would have made the 
Crane Co. pay the Texas tax if it had been based simply on total capital stock, without 
the inclusion of its surplus and other assets in excess of its authorized capital. In 
distinguishing the Baltic Case, Judge Meek made no mention Of the maximum con- 
tained in the Massachusetts statute. The distinction made is as follows: 

"The case of the Baltic Mining Company, cited supra, was not one in which there 
was any such necessary relation between the amount of the excise charge and the 
amount or value of the corporation's property outside of the state or of its interstate 
or foreign business. The charge imposed by the statute there in question was measured 
by the amount of the par value of its authorized capital, without regard to the actual 
value of its assets, whether more or less than that of its nominal capital stock. The 
charge was not measured by the amount or value of the corporation's assets or the 
extent of its actual business anywhere or of any kind. The terms of the statute made 
the charge the same, whether the actual value of the assets of the corporation was more 



776 HARVARD LAW REVIEW 

way of advice to the legislature, the Montana court declared that 
the statute of that state could not be applied to any foreign cor- 
poration engaged in any kind of interstate commerce. It intimated 
also that it would not help matters to amend the statute and set 
a reasonable maximum to the annual imposition. In this it clearly 
misconceived the decision of the Supreme Court in the Baltic 
Case. The courts of California, Massachusetts, Tennessee, and 
Virginia went to the opposite extreme, and declared that no maxi- 
mum was necessary. The supreme court of Idaho 190 took the 
middle position. In upholding the tax which came before it, it 
gave as a reason the fact that the Idaho statute provided that 
no corporation should be required to pay more than $150. It im- 
plied that if the maximum were not kept reasonably low, the 
statute would be invalid. 

The California case involved a corporation whose business 
within the state consisted of local and interstate sales of products 
manufactured in other states. The similarity between this business 
and that of the Crane Company in Looney v. Crane Co. 191 makes 
it certain that, on writ of error, the judgment of the California 
court would be reversed by the United States Supreme Court. 
Whether a similar fate would befall the judgments of the Massa- 
chusetts, Tennessee, and Virginia courts would depend upon 
whether the Supreme Court could be persuaded that excises on 
foreign corporations engaged in non-commercial activities within 
the state may be measured in ways that are vain when chosen for 
corporations engaged exclusively in what the law calls commerce. 

The West Virginia statute which came before the federal district 
court in Baldwin Tool Works v. Blue 192 adopted the measure of 
receipts rather than of capital stock. It professed to look only 
to receipts derived from business done within the state. It did 
not, however, exclude receipts from interstate commerce carried 

or less than the amount of the par value of its authorized capital stock, and whatever 
may have been the nature or extent of the business in which it was engaged." 

The United States Supreme Court in sustaining the lower court gave no indication 
that it sanctioned any such distinction, or that it would have decided differently had 
the Texas statute excluded from consideration all assets in excess of the authorized 
capital. See 31 Harv. L. Rev. 603-04, 614-15. 

190 j n Northern Pacific Railway Co. v. Gifford, note 69, supra. 

191 Note 13, supra. 

192 Note 146, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 777 

on within the state. Such receipts are not taxable directly. They 
may, however, be made the basis for the valuation of property 
within the state, 193 or for the assessment of taxes wholly 194 or 
partially 195 in lieu of taxes on property. On the question whether 
they may be made the measure of taxes on a privilege extended to 
a foreign corporation, the Supreme Court has not explicitly declared 
itself subsequent to its abandonment of its earlier doctrine that 
privileges within the power of the state to withhold may be taxed 
as the state may please. 

Looney v. Crane Co., 1% however, made it clear that a state must 
show good cause why it should be allowed to measure any tax, other 
than a property tax, by elements that cannot be levied on directly. 
The only cause that has been accepted as sufficient for taxes on for- 
eign corporations is the inclusion in the statute of a reasonable maxi- 
mum. 197 Such a provision really makes the tax a specific one, with a 
sliding discount in favor of corporations of little capital. Only in the 
case of such smaller corporations is the tax measured by their total 
capital stock. If the maximum is no more than the amount which 
might be imposed as a flat charge on all seeking admission for 
domestic business, the reference to total capital stock may be 
regarded as an act of grace towards those who can benefit from it. 
The sanction given by the Supreme Court to the Massachusetts 
statute applied in the Baltic Case 198 is grounded on considerations 
which have no bearing on taxes measured by receipts from inter- 
state commerce, or on taxes measured by total capital stock and im- 
posed on corporations whose interstate commerce is conducted in 
connection with local manufacturing rather than with local sales. 

The Looney Case 199 indicates that the Supreme Court is working 
towards a more definite rule than any which could be inferred 
from its earlier decisions following the Western Union Case. 200 
That definite rule promises to be one to the effect that only by 
setting a reasonable limit to its annual imposition may a state 
measure taxes on foreign corporations engaged partly in interstate 

193 Adams Express Co. v. Ohio, note 181, supra. On rehearing, 166 U. S. 185, 17 
Sup. Ct. 604 (1897). 

194 United States Express Co. v. Minnesota, note 166, supra. 

195 Maine v. Grand Trunk Railway Co., note 3, supra, as interpreted in Galveston, 
H. & S. A. Ry. Co. v. Texas, note 153, supra. 1% Note 13, supra. 

197 Baltic Mining Co. z>. Massachusetts, note 8, supra. 198 Note 8, supra. 
199 Note 13, supra. 200 Note 4, supra. 



778 HARVARD LAW REVIEW 

commerce, by any elements that are immune from a direct levy. 
The only indefiniteness lurking in this definite rule arises from the 
question of what limits will be regarded as reasonable, and the 
further question whether the limits may be graduated in accordance 
with the size of the corporation. There is good reason to believe 
that the statutes sustained and applied by the federal court in 
West Virginia, and by the state courts of California, Massachusetts, 
Tennessee, and Virginia, will be discountenanced by the United 
States Supreme Court. The states have had clear warning of the 
risks they run in imposing on foreign corporations excises that 
seek by indirection to reach the fruits of interstate commerce or to 
enjoy an increment by reason of property or business in other states. 
The possibility that the Supreme Court will disapprove of the 
state decisions under review suggests interesting questions with 
respect to the practical operation of our federal system. Until 
some perservering litigant carries its case from the state court to 
the federal Supreme Court, the states may continue to do what the 
Supreme Court would restrain. The law that many foreign cor- 
porations live by may be quite different from the law that the 
Supreme Court would declare. It would be interesting to know 
how many foreign corporations have paid their taxes under the 
statutes of California, Massachusetts, Tennessee, Texas, Virginia, 
and West Virginia, without appealing to the courts for relief. 
It would be interesting to know how many successful objectors 
to taxation escape from legitimate demands of the states, because 
the legitimate demand is inseparable from what is declared invalid. 
Our method of testing the conformity of state legislation to the 
requirements of the federal Constitution is often cumbrous in its 
operation. Successful resistance to state laws often costs more 
than acquiescence. The expense of settling questions of general 
public concern has to be borne by individual litigants. The system 
works well enough for those who are interested only in the evolution 
of constitutional doctrine. But it is not unthinkable that some 
day we may devise improvements that will meet the objections 
which might be raised by those who are concerned primarily with 

results. 

(To be continued) 

Thomas Reed Powell. 
Columbia University. 



932 HARVARD LAW REVIEW 



INDIRECT ENCROACHMENT ON FEDERAL 

AUTHORITY BY THE TAXING POWERS 

OF THE STATES. 1 IV 

II. Regulations of Interstate Commerce (continued) 
2. Taxes not Discriminating against Interstate Commerce (continued) 

A. Taxes on Privileges (concluded) 

(d) Recent Supreme Court Decisions on California and 
Massachusetts Statutes 

IN the preceding installment of this discussion it was said that 
the similarity between the business of the complainants in the 
California case of Albert Pick & Co. v. Jordan 2 "and that of the 
Crane Company in Looney v. Crane Co. 3 makes it certain that, on 
writ of error, the judgment of the California court would be re- 
versed by the United States Supreme Court." 4 This venturesome 
prediction was made in ignorance of the fact that on June 4, 191 7, 
the judgment of the California court had been affirmed by the 
Supreme Court. 5 Benevolent readers may find some excuse for 
this oversight in the circumstance that the Supreme Court wrote 
no opinion, and therefore its decision did not find its way into the 
digests. 6 More justification, however, is necessary for the error in 
judgment. 

The opinion of the California court, by Judge Henshaw, did not 

1 For preceding installments of this discussion see 31 Harv. L. Rev. 321-72 (Jan- 
uary, 1918), Ibid., 572-618 (February, 1918) and Ibid., 721-78 (March, 1918). 

2 169 Cal. 1, 145 Pac. 506 (1915). 

3 245 U. S. 178, 38 Sup. Ct. Rep. 85 (1917). 

4 31 Harv. L. Rev. 776. 

5 Albert Pick & Co. v. Jordan, 244 U. S. 647, 37 Sup. Ct. Rep. 741 (1917). 

6 Malevolent readers will be glad to know that the decision came to the writer's 
attention through no diligence of his own, but through the fact that it was cited in 
the brief for the Commonwealth in International Paper Co. v. Massachusetts, 38 
Sup. Ct. Rep. 292 (1918), a copy of which was furnished him through the courtesy 
of Wm. Harold Hitchcock, Assistant Attorney General of Massachusetts, who prepared 
and argued the cases for the Commonwealth discussed in this article. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 933 

recite the provisions of the statutes under which the excises in 
issue were levied. It referred to "the annual corporation license- 
tax" as one "founded on the total capital stock"; 7 it pointed out 
that the Western Union Company, if it had undertaken to do 
business in California, would have been compelled to pay a fee of 
$10,000 for filing with the Secretary of State a copy of its charter as 
it was required to do, in addition to an annual license tax of $250; 8 
and it saw no significance in the fact that the Massachusetts tax 
sustained in Baltic Mining Co. v. Massachusetts 9 was by statute 
limited to $2,ooo. 10 No mention was made of any provision in the 
California statute prescribing a maximum which the imposition 
should not exceed. The opinion proceeded on a theory quite in- 
consistent with that announced by the Supreme Court in Looney 
v. Crane Co. 11 

The Supreme Court, in affirming the judgment of the California 
court, contented itself with filing the following memorandum 
opinion : 

"June 4, 1917. Per Curiam: Judgment afiirmed with costs, upon 
the authority of Kansas City, Ft. S. & M. R. Co. v. Botkin, 240 U. S. 
227, 60 L. Ed. 617, 36 Sup. Ct. Rep. 261." 12 

The Botkin Case thus relied upon by the Supreme Court involved 
the Kansas statute as amended following the decision of Western 
Union Telegraph Co. v. Kansas. 13 The amended statute limited 
the annual imposition to $2,500. Moreover the complainant in the 
Botkin Case was a domestic corporation. The complainant in 
Albert Pick & Co. v. Jordan u was an Illinois corporation resisting 
a California tax. Kansas City, M. &• B. R. Co. v. Stiles* decided 
on December 4, 1916, had made it clear that a domestic corpora- 
tion could be subjected to a tax which the Western Union Case 
had declared could not be imposed on a foreign corporation, and 



7 Albert Pick & Co. v. Jordan, 169 Cal. 1, 14, 145 p ac. 506 (1915). 

8 Ibid., 169 Cal. 1, 13, 14s ? ac - 5°6 (1915)- 

9 231 U. S. 68, 34 Sup. Ct. Rep. 15 (1913). 

10 Albert Pick & Co. v. Jordan, 169 Cal. 1, 18, 145 Pac. 506 (1915). 

11 Note 3, supra. 

12 Note 5, supra. 

13 216 U. S. 1, 30 Sup. Ct. Rep. 190 (1910). 

14 Notes 2 and 5, supra. 

15 242 U. S. in, 37 Sup. Ct. Rep. 56 (1916). See 31 Harv. L. Rev. 599-6°°- 



934 HARVARD LAW REVIEW 

thus had made inapplicable to controversies respecting foreign 
corporations, precedents sustaining identical taxes on domestic 
corporations. Clearly then the Supreme Court was not justi- 
fied in asserting that the Botkin Case 16 answered the contentions 
of the complainant in the Pick Case, 17 unless Pick and Company 
were a domestic corporation, and unless in addition the excises of 
which it complained were levied under statutes which set some 
limit to the amount which might be charged. 

It is conceivable that on June 4, 191 7, when the Pick Case was 
decided, the Supreme Court was of the opinion that foreign cor- 
porations not engaged in transportation were subject to any ex- 
actions which might be imposed on domestic corporations. But 
even then, if it was aware that the California exaction was meas- 
ured by total capital stock with no maximum limitation, it should 
have rested the Pick Case on the authority of the Stiles Case 18 
rather than the Botkin Case. 19 And if on June 4, 191 7, the Supreme 
Court harbored the idea that foreign corporations not engaged in 
transportation might be subjected to taxes measured by total 
capital stock, that idea was definitely cast out on December 10, 
191 7, when Looney v. Crane Co. 20 was decided. 

It is doubtless true, however, that the Kansas tax involved in 
Kansas City, Ft. S. &° M. R. Co. v. Botkin 21 might be exacted from 
a foreign corporation. But this is because Kansas set a fixed limit 
to its demands, however large the capital of the corporation. In 
citing the Botkin Case as conclusive of the point at issue in the 
Pick Case, the Supreme Court must therefore have thought either 
that the California statutes limited the exactions which might be 
imposed thereunder, or else that the absence of such a limit was 
immaterial. The latter hypothesis seems inconsistent with Looney 
v. Crane Co. 22 But it may not be, as will be pointed out later. 

If the Supreme Court thought that the California exaction was 
limited in amount, however large the capital of the corporation in 
question, it was in error. The Pick Case originated in a petition 
by the foreign corporation for a mandate against the secretary of 
state, directing him to accept and file certain papers without pay- 

16 240 U. S. 227, 36 Sup. Ct. Rep. 261 (1916). 

17 Note 5, supra. 18 Note 15, supra. 
19 Note 16, supra. 20 Note 3, supra. 
21 Note 16, supra. 22 Note 3, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 935 

ment of the fee exacted by subdivision 4 of section 409 of the 
Political Code, or of the corporation license tax of 1905. The 
annual license tax was limited in amount. It began at $10 for 
corporations with capital of $10,000 or less, and rose to $200 for 
corporations with capital not exceeding $5,000,000. But all cor- 
porations having a capital in excess of $5,000,000 paid only $250, 
however large their capital. 23 But the fees to be paid for riling with 
the secretary of state a copy of the corporate charter increased in- 
definitely, and the filing of the charter and payment of the fee were 
conditions prerequisite to the right to do local business within the 
state. Corporations with a capital between $500,000 and $1,000,000 
had to pay $100. If the capital stock exceeded $1,000,000, the 
statute called for "$50 additional for every $500,000 or fraction 
thereof of capital stock over and above $1,000,000." 24 Thus cor- 
porations had to pay $100 for every $1,000,000 of capital stock. 
As was stated in the opinion of the California court, the Western 
Union Telegraph Company under this statute would have been 
compelled to pay $10,000 in California, as against the $20,100 
which it had to pay under the Kansas statute involved in Western 
Union Telegraph Co. v. Kansas. 25 

Thus one of the statutes complained of by Albert Pick and 
Company imposed a fee graduated according to capital stock, with 
no maximum limit. This fee, however, under the terms of the 
statute had to be paid but once. On this ground the statute might 
be distinguished from the Texas statute in Looney v. Crane Co. 26 
which called for recurrent payments each decade. But to sanc- 
tion such a distinction would do violence to Western Union Tele- 
graph Co. v. Kansas 27 since the Kansas statute there involved 
called only for a single payment for filing a copy of the corporate 
charter. A provision in the Kansas statute to the effect that any 
corporation applying for a renewal of its charter should comply 
with the act to the same extent as provided for the chartering and 
organizing of new corporations, was not referred to in the opinion 

23 The statutory provision for the annual license fee is quoted in H. K. Mulford Co. 
v. Curry, 163 Cal. 276, 279-80, 125 Pac. 236 (1912). 

24 The statutory provision for the filing fee is quoted in H. K. Mulford Co. v. Curry, 
163 Cal. 276, 279, 125 Pac. 236 (1912). 

25 Note 13, supra. 

26 Note 3, supra. • 

27 Note 13, supra. 



936 HARVARD LAW REVIEW 

of the court and seems to be drawn to apply to domestic rather 
than to foreign corporations. It would seem therefore that the 
Western Union Case held squarely that a fee for filing a copy of 
the corporate charter could not be demanded even once, if it was 
measured by the total capital stock, with no maximum limit. 

It is not to be lightly assumed that th^e Supreme Court in affirm- 
ing the California judgment without opinion meant to depart 
from this prior ruling. No objection can be raised to the affirmance 
of the judgment, for the petitioner sought to compel the filing of 
its papers without paying either the fifing fee or the annual license 
tax. The latter was properly demanded by the state, since its 
amount was limited to $250. The petitioner, therefore, was not 
entitled to judgment on its demurrer to the answer of the secretary 
of state. But the opinion of the state court had sanctioned the 
requirement of the unlimited filing fee as well as of the limited 
annual license fee. The Supreme Court, therefore, in affirming 
the judgment below, without rendering an opinion, has given the 
California court reason to believe that its opinion as well as its 
decision was warranted. The Supreme Court has thus left a loop- 
hole for further controversy, which might have been closed by an 
opinion indicating the specific grounds on which it sustained the 
court below. 

The filing fee demanded of the petitioner was only $100, as its 
capital did not exceed $1,000,000. Such a fee is a moderate one to 
exact from a corporation of any size, particularly if it is to be de- 
manded only once. As a specific charge it would seem not open 
to question. But the Supreme Court seems to have regarded a fee 
assessed on a vicious basis as thoroughly tainted by its associa- 
tions, even though in other company or as a specific charge it 
would be deemed without fault. The inference, then, that the 
Supreme Court in sustaining the California court in the Pick 
Case 28 deliberately sanctioned the measure adopted by the Cali- 
fornia statute for fixing the amount of the filing fee, cannot be 
accepted. The only grounds on which such sanction could be legi- 

28 It is of course possible that, as the Pick Case was presented to the Supreme Court, 
the objection to paying the $100 filing fee was not urged. But as the record is presented 
by the statutes, the opinion of the California court, and the memorandum opinion of 
the Supreme Court, there is nothing to show that the issues presented to the Supreme 
Court differed from those passed upon by the state court. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 937 

timately based are inconsistent with the implications to be 
drawn from the combination of the Western Union Case with the 
case of Locomobile Co. of America v. Massachusetts. , 29 The former 
stands for the ruling that a single charter fee is subject to the same 
restrictions as an annual license fee. The latter holds that a cor- 
poration may complain of the removal of the statutory maximum 
limit to the annual imposition, even though the presence or ab- 
sence of such limit does not affect the amount demanded from it. 

The Locomobile Case 30 was one of three decisions handed down 
by the Supreme Court on March 4, 1918. All three involved the 
exactions required of foreign corporations by the Commonwealth 
of Massachusetts. Cheney Brothers Co. v. Massachusetts 31 dealt 
with the Massachusetts statute of 1909 which had been applied in 
Baltic Mining Co. v. Massachusetts. 32 The complaining corpora- 
tions were those against whom judgments were rendered by the 
Supreme Court of the Commonwealth in Marconi Wireless Tele- 
graph Co. v. Commonwealth, 33 considered in the previous install- 
ment of this discussion. 34 The judgments of the court below were 
sustained, with the single exception of that .rendered against the 
Cheney Brothers Company. 

The issue presented to the Supreme Court was whether the 
several corporations were engaged in local commerce which was 
separate and distinct from their interstate commerce. The Cheney 
Brothers Company kept no stock of goods in Massachusetts. Its 
Boston office was headquarters for salesmen, and samples were 
kept there. All orders obtained by salesmen in Massachusetts 
were subject to approval by the home office in Connecticut, and 
were filled from stock kept outside of Massachusetts. Collections 
were made from the home office in Connecticut, and from that 
office were paid the salaries of the Massachusetts salesmen and the 
rent of the Boston office. The Supreme Court held that there was 
nothing done in Massachusetts "that can be regarded as a local 
business as distinguished from interstate commerce." 35 The 

29 38 Sup. Ct. Rep. 298 (1918). 

30 Note 29, supra. 

31 38 Sup. Ct. Rep. 298 (1918). 

32 Note 9, supra. 

33 218 Mass. 558, 106 N. E. 310 (1914). 

34 31 Haev. L. Rpv. 741-45 (March, 1918). 

35 38 Sup. Ct. Rep. 295, 296 (1918). 



938 HARVARD LAW REVIEW 

display of samples in Boston was said to be merely a means for 
carrying on interstate commerce. The inference or assumption 
relied on by the state court, to the effect that Massachusetts sales- 
men took some orders from Connecticut purchasers which were 
filled from the Connecticut mill, was said not to give any warrant 
to Massachusetts to tax the corporation, on the ground that it was 
engaged in local as well as interstate business. "In such cases," 
said Mr. Justice Van Devanter, "it is doubtless true that the re- 
sulting sale is local to Connecticut, but the action of the Boston 
office in receiving the order and transmitting it to the home office 
partakes more of the nature of interstate intercourse than of busi- 
ness local to Massachusetts and affords no basis for an excise tax 
in that state." 36 

Among the corporations held subject to the excise tax was the 
Locomobile Company of America, a West Virginia corporation 
manufacturing automobiles in Connecticut, and doing in Massa- 
chusetts, in addition to interstate commerce, "an extensive local 
business ... in repairing cars of its own make and use, and also 
in selling second-hand cars taken in partial exchange for new 
ones." 37 The excise in question was levied under the Act of 1909, 
which fixed the amount by taking one-fiftieth of one per cent of 
the total capital stock until the tax amounted to $2,000. A simple 
computation will reveal that the only corporations which could 
derive any benefit from this provision for a maximum are those 
whose capital is in excess of $10,000,000. In 1913, when the ex- 
cise was levied, the Locomobile Company had a capital of $5,000,000, 
and the tax of $1,000 demanded from it was in no way affected as 
to its amount by the provision in the statute that no tax should 
exceed $2,000. 

In 1914 Massachusttes passed the following statute: 

"Every foreign corporation subject to the tax imposed by section 
fifty-six of Part III of chapter four hundred and ninety of the acts of 
the year nineteen hundred and nine shall in each year, at the time of 
filing its annual certificate of condition, pay to the treasurer and receiver 
general for the use of the commonwealth, in addition to the tax imposed 
by said section fifty-six, an excise tax to be assessed by the tax commis- 
sioner of one one-hundredth of one per cent of the par value of its author- 



36 38 Sup. Ct. Rep. 295, 296 (1918). 

37 38 Sup. Ct. Rep. 295, 297 (1918). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 939 

ized capital stock in excess of ten million dollars as stated in its annual 
certificate of condition." 3S 

The section fifty-six referred to was the provision applied to the 
Locomobile Company in the Cheney Brothers Case. 39 Inasmuch 
as the measure adopted for assessing the excise exacted by the 
Act of 1914 was the amount which the capital stock exceeded 
$10,000,000, the Locomobile Company, though belonging to the 
class of corporations required by the Act of 1914 to pay the addi- 
tional excise, did not come within the clutches of the measure by 
which the amount of the tax was determined. The Act of 1914 
could not, therefore, operate in any way to the disadvantage of 
the Locomobile Company, unless during the preceding year its 
capital stock had more than doubled. 

No such doubling had taken place. The authorized capital had 
been increased from $5,000,000 to $6,500,000, so that the excise 
assessed in 1915 was $300 larger than that assessed in 1913. But 
the Locomobile Company was still $3,500,000 away from the fangs 
of the Massachusetts statute of 1914. The Supreme Court of 
Massachusetts sustained the $1,300 tax of 1915 40 on the au- 

38 St. 1914, c. 724, 1. The section is quoted in International Paper Co. v. Massa- 
chusetts, 38 Sup. Ct. Rep. 292 (1918). 

39 Note 31, supra. The section is quoted in International Paper Co. 11. Massa- 
chusetts, 38 Sup. Ct. Rep. 292, 293 (1918). It reads as follows: 

"Every foreign corporation shall, in each year, at the time of filing its annual cer- 
tificate of condition, pay to the treasurer and receiver general, for the use of the Com- 
monwealth, an excise tax to be assessed by the tax commissioner of one fiftieth of one 
per cent of the par value of its authorized capital stock as stated in its annual certifi- 
cate of condition; but the amount of such excise tax shall not in any one year exceed 
the sum of two thousand dollars." Before the enactment of the Act of 1914, the Act 
of 1909 had been limited in respect to the corporations to which it is applicable by the 
decision of the Supreme Court of Massachusetts in Attorney General ex rel. Commis- 
sioner of Corporations v. Electric Storage Battery Co., 188 Mass. 239, 74 N. E. 467 
(1905). The interpretation of the state court was summarized by the Supreme Court 
of the United States in Baltic Mining Co. v. Massachusetts, 231 U. S. 68, 84, 34 Sup. 
Ct. Rep. 15 (1913), as follows: 

" Construing the act in question, the supreme judicial court of Massachusetts has 
held that it does not apply to corporations engaged in railroad, telegraph, telephone, 
etc., business, which are taxed on another plan under the provisions of the statute. It 
is held not to apply to corporations whose business is interstate commerce, or who 
carry on interstate and intrastate business in such close connection that the intrastate 
business cannot be abandoned without serious impairment of the interstate business 
of the corporation. And the statute, it is held, does not apply to corporations which 
have places of business for the transaction solely of interstate commerce." 

40 Locomobile Company of America v. Commonwealth, 228 Mass. 117, 117 N. E. 5 
(1917)- 



940 HARVARD LAW REVIEW 

thority of Baltic Mining Co. v. Massachusetts. 41 Chief Justice 
Rugg, in the concluding sentence of the opinion, observed: "Since 
no part of the excise here challenged was levied under the terms of 
St. 1914, c. 724, that statute need not be considered." ^ 

But the Supreme Court of the United States took a different 
view. Mr. Justice Van Devanter declared that the "tax is of a 
designated per centum of the entire authorized capital, and was 
imposed after the maximum limit named in St. 1909, c. 490, Part 
III, § 56, was removed by St. 1914, c. 724, § 1." ^ He held there- 
fore that "as thus changed the statute is in its essence and prac- 
tical operation indistinguishable from those adjudged invalid in 
Western Union Telegraph Co. v. Kansas, 216 U. S. 1; Pullman Co. 
v. Kansas, 216 U. S. 56; Ludwig v. Western Union Telegraph Co., 
216 U. S. 146, and Looney v. Crane Co., 245 U. S. 178." u 

This construction of the Massachusetts excise system was 
possible only because the $2,000 maximum in the Act of 1909 
afforded no protection to a corporation whose capital was less 
than $10,000,000, and because the Act of 1914 imposed an addi- 
tional unlimited excess measured by capital in excess of that 
amount. There was no hiatus between the two taxes. The second 
took hold where the first let go. It was therefore good realism to 
insist that the second removed the maximum limit contained in the 
first. Massachusetts after 1914 had a taxing system which made 
the excises on foreign corporations increase indefinitely pari passu 
with increase of their capital stock. The practical result would 
have been the same had the Act of 19 14 designated as the corpora- 
tions subject to its demands, not those named in the Act of 1909, 
but only corporations having a capital in excess of $10,000,000. It 
would have been substantially the same had the class been desig- 
nated as those corporations having a capital in excess of $10,100,- 
000, or had the maximum in the Act of 1909 been lowered to $1,900. 
Either of these devices would have created a gap between the two 
demands of the state. But such lacunae might well be disregarded 
on the principle of de minimis non curat lex. A steadily growing 
corporation would find in them too brief a respite. 

41 Note 9, supra. 

42 228 Mass. 117, 122, 117 N. E. s (1917). 

43 Locomobile Company of America v. Massachusetts, 38 Sup. Ct. Rep. 298 (1918). 
« Ibid. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 941 

We must concede that it was a sensible practical judgment 
which characterized the Massachusetts tax as one based on total 
capital stock, with no maximum limitation. Yet the situation 
resulting from the two contemporaneous decisions of the Supreme 
Court, in both of which the Locomobile Company was a com- 
plainant, exhales an atmosphere of artificiality. On the very same 
day the court sustains one excise measured by the total capital 
stock of the Locomobile Company, and declares invalid another 
whose amount is determined by the identical measure so far as 
the complainant was concerned. Both excises according to the 
state court were levied under the same statute. True, the statu- 
tory situation had been changed in the interim by the provision 
in the Act of 1914 imposing an additional excise measured by the 
capital in excess of $10,000,000. Those who bow to the authority 
of arithmetic must concede that this additional excise had the effect 
of removing the maximum of $2,000 contained in the Act of 1909. 
But the result reached by the Supreme Court is that a corporation 
which did not benefit from the $2,000 maximum, and which could 
not under the facts of the case before the court be injured by its 
removal, nevertheless reaps from such removal the boon of im- 
munity from previously valid demands. 

This seems strange fruit to pick from the stock of realism. But 
on closer analysis it may appear that the fruit is from another tree. 
The artificiality was introduced when it was held in the Baltic 
Case that a tax on small corporations, measured by their total capi- 
tal stock, was valid because a tax on their larger competitors or 
neighbors would be a specific charge of $2,000. The result of the 
Locomobile Case really questions the soundness of the Baltic Case. 
Yet the Locomobile Case cannot be said to shake the authority of 
the Baltic Case, since the Baltic Case was unanimously reaffirmed 
in the Cheney Brothers Case decided on the same day as the Loco- 
mobile Case. Quite plainly the Supreme Court has no present 
intention of receding from the Baltic Case. 

The present state of the law can best be justified by being formu- 
lated as follows. Foreign corporations conducting within a state 
a local business which is distinct from their interstate business are 
subject to taxation for such exercise of their corporate functions. 
This taxation may take theform of a specific charge of a reasonable 
amount. $2,000 is a reasonable amount, whatever the size of the 



942 HARVARD LAW REVIEW 

corporation, and whatever the volume of the local business. If 
the state wishes to relieve corporations with small capital from the 
payment of the full $2,000, it may do so by giving what is in effect 
a sliding discount determined by the extent to which their capital 
stock falls short of $10,000,000, or some other properly designated 
sum. "If the maximum is no more than the amount which might 
be imposed as a flat charge on all seeking admission for domestic 
business, the reference to total capital stock may be regarded as an 
act of grace towards those who can benefit from it." 45 

It may be added that, even if the maximum were more than 
might be imposed as a flat charge on all, the court may properly 
regard this defect as cured by a provision for a discount in favor 
of those on whom it would be improper to impose the maximum. 
In such a provision it may find a sufficient reason for treating the 
question whether the maximum might be imposed on all as a purely 
hypothetical one, into which it need not enter in order to determine 
the dispute before it. This line of reasoning undoubtedly has 
curves which to some may make the line look like a circle. The 
premise on which the argument is built seems to be kicked out from 
under, after it has served its initial purpose. The difficulty can 
perhaps be avoided if we say that what maximum is reasonable 
varies with circumstances. Call this reasonable maximum, X. 
X may be larger where it is not the measure for taxes on small cor- 
porations than where it is. If in some cases the state provides that 
the tax shall be X — Y, and in others X— Z, then X may be regarded 
as reasonable provided it is suitable for all those cases for which it 
is made the sole measure. Even with this line of approach, it may 
well be urged that the court should consider the reasonableness of 
Y and Z. "Corporations with little capital might prefer a low 
rate applied to total capital, with no maximum, to a higher rate 
applied to total capital, with a maximum which would not affect 
the amount exacted of them." 46 

Perhaps after all the composite photograph of the decisions can- 
not be put in a logical frame. To many minds this would neces- 
sitate the conclusion that some of the decisions are "wrong." This 
easy way out of difficulties has its train of worshippers. But it 
would afford little solace to those corporations whose taxes were 

46 31 Harv. L. Rev. 777. ** Ibid., 612. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 943 

sanctioned by the decisions thus thrown into the discard. These 
entities, if they reasoned, might face with less rebellion the unes- 
capable facts, by following the implication of Mr. Justice Holmes's 
statement that "we are to look for a practical rather than a logical 
or philosophical distinction." 47 And those whom William James 
was wont to call the "tough-minded" will easily follow the lure of 
the same bait. 

From this angle, the decisions since 1910 may be looked at as 
modifications of the earlier doctrine that the power of the state over 
the local business of foreign corporations is unlimited. The earlier 
doctrine has not been abandoned to the extent of insisting that the 
exaction of the state must be nicely adjusted to the amount of local 
business carried on therein. Though the old arbitrary power has 
been throttled, the state still has some latitude in fixing the amount 
of its exaction. The tax falls on a proper subject, and its amount, 
like that of all excise taxes, may be fixed by more rough-and-ready 
methods than could be used in assessing ad valorem taxes on prop- 
erty. All that is required is that the methods selected shall not 
palpably and necessarily exact tribute from sources which lie within 
the protection of the commerce clause and the due-process clause. 
A maximum limitation on the demand is a safeguard against such 
covert invasion of forbidden territory by excises on large corpora- 
tions. There is still the possibility that the limit set may not suffice 
to prevent excises on small corporations from encroaching on the 
area in which such small corporations are entitled to shelter. But 
this danger is greatly minimized if small corporations are assessed on 
a basis which is likely in most cases to give them the advantage of 
the circumstances which would make the maximum levy infringe 
their constitutionally protected interests. 

As to the dangers which are not wholly averted, it can only be 
said with Mr. Justice Holmes that "constitutional law, like other 
mortal contrivances, must take some chances." 48 Courts cannot 
project the lines of constitutional limitations with the same delicate 
tracery with which they might draft statutes. Judges should be 
loath to declare invalid a fiscal system which is an exercise of con- 
stitutional power, merely because in some stray instances it may 

47 Galveston, H. & S. A. R. Co. v. Texas, 210 U. S. 217, 227, 28 Sup. Ct. Rep. 638 
(1908). The passage is quoted more at length in 31 Harv. L. Rev. 602. 

48 Blinn v. Nelson, 222 U. S. 1, 7, 32 Sup. Ct. Rep. 1 (1911). 



944 HARVARD LAW REVIEW 

operate in a manner that might be deemed unconstitutional if 
specifically devised for the particular case. Common law, statutes, 
and constitutional interpretation alike must at times, for the sake 
of a desirable degree of stability and generality, sacrifice the pre- 
cision of adjustment that might be attained by kaleidoscopic or 
tessellated variations or modifications of the law to meet the pecu- 
liar demands of every conceivable situation. The Supreme Court 
has sacrificed generality in recognizing that a suitable maximum 
may remedy the vice of the measure of total capital stock. If it 
stops there, and declines to examine the balance sheets of every 
contentious taxpayer, it simply establishes a point beyond which 
for practical reasons it will not go. Whether or not these considera- 
tions furnish sufficient justification for the tenuousness of the logical 
distinction between the Baltic Case and the Cheney Brothers Case 
on the one hand, and the Locomobile Case on the other, they may 
at least explain where they do not justify. 

Those who agree that the General Court of Massachusetts sought 
to subject foreign corporations to excises measured by their total 
capital stock without any qualification, and thus to accomplish 
what Looney v. Crane Co. 49 had forbidden, may still criticize the 
result of the Supreme Court's decision in the Locomobile Case. 50 
It will be noted that the Supreme Court of the United States in- 
sisted that the Massachusetts statute of 1914 was a material element 
in the case before it, although the Massachusetts court had declared 
that it "need not be considered." 51 Thus the Supreme Court holds 
that the two statutes of Massachusetts are inseparable, although the 
Massachusetts court had clearly implied the contrary. The reason 
for the Supreme Court's attitude appears more clearly from its 
opinion in International Paper Co. v. Massachusetts? 2 decided on 
the same day as the Locomobile Case. 

The International Paper Case involved an excise of $5,500 on a 
foreign corporation having an authorized capital of $45,000,000. 
Of this $5,500, $2,000 was levied under the Act of 1909, and $3,500 
under the Act of 1914. It will be remembered that the Massa- 
chusetts court on September 13, 1917, had sustained the entire 

49 Note 3, supra. 

50 Note 43, supra. 

51 Note 42, supra. 

62 38 Sup. Ct. Rep. 292 (1918). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 945 

exaction. 53 The Supreme Court declares the whole levy invalid. 
In considering the Massachusetts legislation, Mr. Justice Van 
Devanter says: 

"While the legislation under which the tax was assessed and collected 
was enacted in part in 1909 and in part in 19 14, its operation and validity 
must be determined here by considering it as a whole, for the opinion 
of the state court not only holds that the ' maximum limitation ' put on 
the tax by the part first enacted 'is removed' by the other, but treats 
the two parts as exacting' a single tax based on the par value of 'the 
entire authorized capital ' and computed as to ten million dollars thereof 
at the rate of one fiftieth of one per cent and as to the excess at the rate of 
one one-hundredth of one per cent." M 

And near the end of the opinion, the statement, that "since 19 14 
the Massachusetts law has been in its essential and practical opera- 
tion like those held invalid" 55 in the Western Union Case and the 
Looney Case, is prefaced by the clause: "Accepting the state 
court's view of the change wrought by the later statute." 56 Thus 
the Supreme Court relies on the interpretation of the state court 
to reach the conclusion that the Act of 1909 is so amalgamated 
with the Act of 1914 that, if the latter cannot stand, the former 
must fall also. 

No such question was passed upon by the Massachusetts court 
in the International Paper Case, 57 for that court held both statutes 
constitutional, and therefore was not called upon to inquire whether 
the Act of 1914 was separable from the Act of 1909. But in its 
opinion in the Locomobile Case, 58 it declared plainly enough that 
the Act of 1914 had no bearing on the validity of the Act of 1909. 
From this it is certain that the Massachusetts court would hold the 
two statutes separable whenever a decision of the controversy before 
it required consideration of the point. No one can doubt that the 
Massachusetts court, if it had thought that the Act of 19 14 was 
inapplicable to foreign corporations engaged partly in interstate 
commerce, would have held that the frustrated attempt of the 

63 International Paper Co. v. Commonwealth, 228 Mass. 101, 117 N. E. 246 (1917). 
See 31 Harv. L. Rev. 745-54. 

54 38 Sup. Ct. Rep. 292, 293 (1918). 

55 38 Sup. Ct. Rep. 292, 294 (1918). 
65 Ibid. 

57 Note 53, supra. 
68 Note 40, supra. 



946 HARVARD LAW REVIEW 

General Court of the Commonwealth did not operate to render 
inapplicable to such corporations the earlier Act of 1909. Yet 
the Supreme Court in effect assumes the contrary, by its failure to 
give specific consideration to the question whether the two statutes 
were separable. It seems to decline to go into the question on the 
ground that the state court had decided it against the contention of 
the complainants. 59 

Doubtless no one will be more surprised at this eventuation than 
the judges of the Massachusetts supreme court. Their dispo- 
sition of the International Paper Case did not require them to 
consider whether one part of the tax could be held good if the other 
was declared invalid. And their analysis of the combined effect of 
the two statutes was not directed to any such issue. Moreover, 
in the Locomobile Case they insisted that the Act of 1909 stood 
entirely on its own legs. Yet the Supreme Court, without giving 
independent consideration to the question, relies on other state- 
ments of the Massachusetts court, wholly unrelated to the question 
of separability, to reach the conclusion that an unconstitutional 
addition to the Act of 1909 must be given the effect of invalidating 
the prior statute, though that is its sole effect. 

Though the Supreme Court accepts the judgment of the state 
court on the question whether different provisions in state statutes 
are separable or not, 60 it forms its independent judgment when the 
state court has not spoken on the point. 61 The test which it applies 
is whether it can reasonably be believed that the legislature would 

59 This cannot be the result of mere inadvertence, for the brief for the Common- 
wealth in the Locomobile Case contains the heading: "The New Statute (St. 1914, 
c. 724) has no Bearing upon the Rights of this Petitioner." Under this heading it 
was argued: 

"If for any reason this new statute is unconstitutional as a whole, or if, by reason 
of particular circumstances in individual cases, any tax imposed under it upon any 
corporation subject to" its terms is void, the system of taxation established by section 
56 remains unaffected. Therefore the additional tax imposed by this statute is plainly 
separable from the tax imposed under section 56, and a decision that any tax under 
the statute of 1914 is invalid cannot affect taxes assessed upon any corporation whose 
authorized capital stock does not exceed $10,000,000. This in substance is the ruling 
of the Supreme Judicial Court of Massachusetts in the case at bar. The ruling of 
that court that these two statutes are entirely separable will, of course, be followed 
here as purely a matter of statutory construction." 

60 Noble v. Mitchell, 164 U. S. 367, 17 Sup. Ct. Rep. no (1896). 

61 International Text Book Co. v. Pigg, 217 U. S. 91, 112-13, 30 Sup. Ct. Rep. 481 
(1910), holding provisions inseparable; Southwestern Oil Co. v. Texas, 217 U. S. 114, 
120-21, 30 Sup. Ct. Rep. 496 (1910), holding provisions separable. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 947 

have enacted the valid part without the part which is declared 
invalid. 62 In Winona and St. Peter Land Co. v. Minnesota,™ for 
example, the question was whether a statute imposing back taxes on 
real and personal property could be enforced as to real property 
if it was invalid as to personal property. The Supreme Court, 
speaking through Mr. Justice Brewer, expressed its approval of 
the decision of the state court as follows: 

"It seems to us, also, that the assumption that it cannot be believed 
that the legislature would never seek to provide for the collection of 
back taxes on real property without at the same time including therein 
a like provision for collecting back taxes on personal property, cannot be 
sustained." M 

So the question which the Supreme Court should have asked and 
answered in the International Paper Case was whether it could 
reasonably be believed that the General Court would have wished to 
tax the complainant $2,000 if it could not tax it $2,000 plus $3,500. 
The question in the Locomobile Case was whether it could rea- 
sonably be believed that the General Court would have wished to 
continue to apply to the complainant the Act of 1909 if it could 
not apply to others the Act of 1914. To borrow a familiar form 
of statement, it can safely be said that "to ask the question is to 
answer it." 

The result reached by the Supreme Court illustrates the hard 
saying that "from him that hath not shall be taken away even that 
which he hath." 65 As exegesis of a puzzling passage of Scripture, 
the decision may be welcomed. It may be a wholesome warning to 
the states not to encroach on forbidden ground, lest their trespasses 
cost them their own freeholds. But apart from its moral values, 
the result was a curious and unnecessary one. Before the passage 
of the Act of 1914, the Act of 1909 was without fault. The Act 
of 1 9 14 did not purport to amend the Act of 1909. It refers to its 
predecessor only to spare itself from enumerating specifically the 
corporations to which it applies. 66 The Supreme Court holds that 

62 Southwestern Oil Co. v. Texas, note 61, supra, loc. cit. 

63 159 U. S. 526, 16 Sup. Ct. Rep. 83 (1895). 

M 159 U. S. 526, 539, 16 Sup. Ct. Rep. 83, 88 (1895). 
65 Matthew 25 : 29. 

68 The Act of 1914, by saying "every foreign corporation subject to the tax imposed 
by section fifty-six" etc., in effect adopts the interpretations of the Massachusetts 



948 HARVARD LAW REVIEW 

the Act of 1914 cannot be enforced against corporations engaged 
partly in interstate commerce. As to them it is void and of no 
effect. Yet it is given the important effect of vitiating the Act of 
1909 in so far as it applies to corporations engaged partly in inter- 
state commerce. The Supreme Court places the burden of this 
result on the shoulders of the Massachusetts court, because that 
court in analyzing and sanctioning the combined effect of the two 
statutes says rightly that the maximum limitation contained in the 
former is removed by the latter. But in thus characterizing the 
effect of the latter on the former, Chief Justice Rugg of the Massa- 
chusetts court was talking arithmetic, not law. His arithmetic 
was correct only if the Act of 19 14 was valid and enforceable. He 
correctly described what Massachusetts sought to do. But it 
failed to accomplish its desires, because the Supreme Court forbade. 
The situation about which the state court was talking turns out 
not to exist. Yet what Chief Justice Rugg said about that situa- 
tion, the Supreme Court treats him as saying about another situa- 
tion which he never had in mind. By such thought transference 
the Massachusetts court is held responsible for the position that the 
Massachusetts excise system after 1914 was a unit which must stand 
or fall as a unit, although that court had stated specifically that in 
determining the constitutionality of enforcing the Act of 1909 after 
the enactment of the Act of 19 14, the latter statute "need not be 
considered." 67 

Plainly enough the Supreme Court misapprehended the position 
of the Massachusetts court. And the state court must be held 
immune from most, if not all, of the responsibility for the blunder. 
It may perhaps be criticized for its failure to appreciate the likeli- 
hood that the Act of 1914 would come a cropper when it reached 
the Supreme Court. Had the Supreme Court handed down its 
decision in Looney v. Crane Co. 68 three months earlier, the Massa- 
chusetts court would have been clearly advised that the unlimited 
measure of total capital stock was an improper one to apply to 
foreign corporations engaged partly in interstate commerce, even 

court as to what corporations are subject to section fifty-six. See note 39, supra. It 
was doubtless because of these interpretations of the court, that the Act of 1914 re- 
ferred to the "corporations subject to the tax imposed" by the Act of 1909, and did 
not read, as did the Act of 1909, "every foreign corporation." 

67 Note 42, supra. 

68 Note 3, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 949 

though that commerce was not some form of transportation. Yet, 
even as the situation stood in September, 191 7, the Massachusetts 
court had ample warning of the strong probability that the Supreme 
Court would insist that a maximum limitation was a sine qua non 
in a statute using total capital stock as a basis for assessing excises 
on foreign corporations combining local and interstate commerce. 
However strong the state court's anticipations to the contrary, it 
would have done v/ell to have appreciated the possibility of dis- 
illusionment, and to have guarded against the unfortunate result 
which ensued. This it might easily have done by devoting separate 
consideration to the levy on the International Paper Company 
under the Act of 1909 and to that under the Act of 1914, thus mak- 
ing it unmistakably clear to the Supreme Court that it did not think 
that the General Court of Massachusetts wished to exempt foreign 
corporations from excise taxes entirely, in case it would not be 
permitted to subject corporations having a capital in excess of 
$10,000,000 to the additional excise imposed in 1914. 

The legal result of the Supreme Court's decision in the Interna- 
tional Paper Case 69 and the Locomobile Case 70 is that all excise taxes 
levied by Massachusetts on foreign corporations engaged partly in 
interstate commerce during the years 1914, 1915, 1916, and 1917 
were unconstitutional interferences with interstate commerce. For 
so the Supreme Court has declared. It happens that most of the 
foreign corporations doing business in Massachusetts during the 
last quadrennium have paid their excises without protest, 71 so that 
the results of the Supreme Court's declarations are less extensive 
than they might have been. Taxes which could be regarded as 
constitutional only "upon the theory that our dual system of gov- 
ernment has no existence" 72 have been paid and cannot be recov- 
ered, yet the government at Washington still lives. This contradic- 
tion between the law and the facts raises nice questions as to the 
conceptualist attitude which partitions governmental power in 
the United States between two authorities, each "sovereign" in its 
respective sphere, each impotent in the sphere of the other, and 

69 Note 52, supra. 

70 Note 43, supra. 

71 From information derived from Wm. Harold Hitchcock, Esq., Assistant Attorney 
General of Massachusetts. 

72 Looney v. Crane Co., 245 U. S. 178, 187, 38 Sup. Ct. Rep. 85 (1917). The passage 
is quoted more at length in 31 Harv. L. Rev. 603-04. 



950 HARVARD LAW REVIEW 

the sphere of each wholly distinct from that of the other. It makes 
a pretty mental picture, but the subject of the picture never sat 
for it. 

Since the decision of the Supreme Court in the Locomobile Case, 
Massachusetts has confessed the error of its ways and has brought 
forth fruits meet for repentance by repealing the offending Act of 
1914. 73 This will doubtless restore the Act of 1909 to favor with 
the Supreme Court from now on, in spite of the fact that the opinion 
in the Locomobile Case referred to it as "indistinguishable from 
those adjudged invalid" 74 in the Western Union Case and those 
following it, thus implying that the Act of 1909 too was "invalid." 
But this usus loquendi is probably a short-cut expression having 
reference only to the particular situation before the court for ad- 
judication. So far as the decisions of the Supreme Court have yet 
gone, the Act of 1909 might all the time have been applied to 
foreign corporations whose business within the state is entirely 
local commerce or manufacture. And even if the Supreme Court 
is now of opinion that the due-process clause protects foreign cor- 
porations from excises measured by their total capital stock, whether 
they are engaged in interstate commerce or not, and that therefore 
the Act of 1909 was entirely unenforceable so long as the Act of 
1914 was on the statute books, it may still recognize that the 
"invalidity" of the Act of 1909 was due entirely to its associa- 
tion with the Act of 191 4, and that the dissolution of the connec- 
tion between them will restore the Act of 1909 to its pristine purity. 
Yet after the court's decision in the Locomobile Case, the general 
Court of Massachusetts might have done well, ex majore cautela, 
to accompany its repeal of the Act of 1914 with an express reenact- 
ment of the Act of 1909, and thus to deprive the Supreme Court 
of any opportunity to declare that the Act of 1909 was so dead 
that it could not be raised to life by the repeal of the Act of 1914. 75 

73 Chapter 76, General Code, Act of 1918; in effect March 18, 1918. 

74 38 Sup. Ct. Rep. 298 (1918), 

75 While such a procedure would have made the future secure, it might be taken 
as a confession which would operate to the disadvantage of the Commonwealth in 
the few pending cases to recover excises levied under the Act of 1909 during the 
period between the enactment and the repeal of the Act of 1914. Those cases are 
of course on all fours with the Locomobile Case. Nevertheless it is still open to the 
state court to declare that the Act of 1914 was always separable from the Act of 
1909, and on that ground to sustain taxes levied under the Act of 1909 after 1914. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 951 

As was to be anticipated, the Supreme Court had no difficulty 
in reaching the conclusion that the International Paper Company 
was entitled to be excused from payment of the excise measured 
by its total capital in excess of $10,000,000. The only possible 
distinction which could be drawn between the question presented 
and that settled in the Looney Case lay in the fact that the Inter- 
national Paper Company was engaged in manufacturing in Massa- 
chusetts. It will be remembered that the Massachusetts court 
seemed to attach some weight to this, observing that "the local 
manufacture of paper is disconnected with the interstate business 
of the petitioner except as an artificial relation has been established 
by the petitioner," 76 and relying on cases holding that manufacture 
is not commerce. 77 The Supreme Court makes no mention of this 
possible distinction between the power of the state over foreign 
corporations whose business within the state consists largely of 
manufacturing and that over those whose entire local business is 
technically commerce. Mr. Justice Van Devanter contents himself 
with summarizing the propositions to be deduced from the line 
of cases beginning with the Western Union Case and ending with 
the Looney Case, and then saying of the Looney Case: 

"That case and those which it followed and affirmed are fully decisive 
of this. The statutes then and now in question differ only in immaterial 
details, and the circumstances of their application or attempted applica- 
tion are essentially the same. In principle the cases are not distinguish- 
able." 78 

With this disposition of the cases from Massachusetts, it seems 
clear that the statute of Virginia applied by the Virginia court in 
General Ry. Signal Co. v. Commonwealth, 79 and the statute of Ten- 

The state court is not bound by the Supreme Court's erroneous interpretation of its 
previous utterance. The Supreme Court, on the other hand, will be bound by a 
definite and unescapable declaration from the state court that the offending Act of 
1914 was entirely separate and distinct from the Act of 1909. Thus the state court 
can prevent the recurrence of the fatality which happened in the Locomobile Case, 
without laying itself open to the charge of attempting to give retroactive effect to 
the repeal of the Act of 1914. 

76 International Paper Co. v. Commonwealth, 228 Mass. 101, 112, 117 N. E. 246 
(1917). See 31 Harv. L. Rev. 749. 

77 See 31 Harv. L. Rev. 746. 

78 38 Sup. Ct. Rep. 292, 295 (191S). 

79 118 Va. 301, 87 S. E. 598 (1916). See 31 Harv. L. Rev. 756-59- 



952 HARVARD LAW REVIEW 

nessee appliecTby the Tennessee court in Atlas Powder Co. v. Blue,* 
will meet with a similar fate when they reach the Supreme Court. 
There is a possibility that the local business of the particular com- 
plainant in the Virginia case might be regarded by the Supreme 
Court as so distinct from any interstate commerce in which the 
corporation was engaged, that its immunity from a demand meas- 
ured by its total capital stock will depend upon whether the Su- 
preme Court will overrule Horn Silver Mining Co. v. New York, 81 
and thus reach the same result under the due-process clause alone as 
it reaches under the due-process and commerce clauses together. 
Yet if manufacturing is not sufficiently distinct from interstate 
commerce to prevent the applicability of the commerce clause, it 
is hard to see how a different attitude can reasonably be taken 
towards construction work done in the state with materials 
introduced from other states. 

The only important question left open by the Supreme Court deci- 
sions is whether excises on foreign corporations engaged partly 
in interstate commerce may be measured by the receipts from all 
business done within the state. On this question the due-process 
clause has no bearing. But the receipts from interstate commerce 
could not be taxed directly, and the question whether they may be 
made the measure of a tax on a proper subject of state authority 
is logically difficult to distinguish from the issues raised under the 
commerce clause in Looney v. Crane Co. 82 and International Paper 
Co. v. Massachusetts. 83 But the Supreme Court has sacrificed strict 
logic for other considerations in sustaining taxes in fact measured 
by the total capital stock of the complaining corporation, provided 
taxes on larger corporations would be fixed by a specific maximum 
provision in the statute. And it may conceivably sacrifice logic 
and hold that the measure of receipts from business actually done 
within the state has not the vice of a measure which includes the 
value of property without the state. 

We might hope to get material for prophecy from Crew Levick Co. 
v. Pennsylvania 8 * decided December 10, 191 7; but the opinion of 

80 131 Tenn. 490, 175 S. W. 547 (1915). See 31 Harv. L. Rev. 754-56. 

81 143 U. S. 305, 12 Sup. Ct. Rep. 403 (1892). 

82 Note 3, supra. 

83 Note 52, supra. 

84 245 U. S. 292, 38 Sup. Ct. Rep. 126 (1917). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 953 

Mr. Justice Pitney carefully left the precise question open. That 
case held that a tax on wholesale and retail dealers of merchandise, 
whose amount was based on the volume of business transacted, 
could not be measured by any receipts from foreign commerce. 
The portion of the tax so measured, it was said, "necessarily varies 
in proportion to the volume of that commerce, and hence is a direct 
burden upon it." 85 And earlier in the opinion it was declared: 

"It [the tax] operates to lay a direct burden upon every transaction 
in commerce by withholding, for the use of the state, a part of every 
dollar received in such transactions. That it applies to internal as well 
as to foreign commerce cannot save it; . . ." 86 

But the opinion also says that "the distinction between this tax" 
and that "sustained in Maine v. Grand Trunk Ry. Co." 87 is "obvi- 
ous;" 88 and it says further that the tax "bears no semblance of a 
property tax, or a franchise tax in the proper sense." 89 

Thus plainly Maine v. Grand Trunk Ry. Co. 90 is left unoverruled, 
and the court has explicitly left itself free to decide that a "fran- 
chise tax in the proper sense" may be measured in part by receipts 
which may not be taxed directly. When such a case comes before 
the Supreme Court, it may remind us that in all the cases annulling 
taxes measured by total capital stock, the due-process clause as well 
as the commerce clause was a factor. And it may say that these 
so-called franchise taxes measured by receipts from business done 
within the state are in substance taxes on intangible property and 
therefore sustainable as such, provided this same intangible property 
has not already been included in the assessment of other taxes. 91 

We shall know later. 

(To be continued.) 

Thomas Reed Powell. 
Columbia University. 

85 245 U. S. 292, 297-98, 38 Sup. Ct. Rep. 126 (1917). 

86 245 U. S. 292, 297, 38 Sup. Ct. Rep. 126 (1917). 

87 142 U. S. 217, 12 Sup. Ct. Rep. 121 (1891). 

88 245 U. S. 292, 298, 38 Sup. Ct. Rep. 126 (191 7). 

89 245 U. S. 292, 297, 38 Sup. Ct. Rep. 126 (191 7). Italics are the writer's. 

90 Note 87, supra. 

91 See 31 Harv. L. Rev. 768, note 166. 



234 HARVARD LAW REVIEW 



INDIRECT ENCROACHMENT ON FEDERAL 

AUTHORITY BY THE TAXING POWERS 

OF THE STATES. 1 V 

II. Regulations of Interstate Commerce (continued) 

2. Taxes not Discriminating against Interstate Commerce (continued) 

B. Taxes on Property 

REFERENCE has already been made to the cases which treat 
franchises as property and consider the assessment of such 
franchises by the criteria which obtain in judging whether taxes 
on property are regulations of interstate commerce. 2 This indicates 
that there is no hard and fast line to be drawn between privileges 
and property. When a franchise may be disposed of for a price, 
it is of course a form of property. Conversely, all property is to 
an extent a matter of privilege. The remedies for interference with 
property interests are essential to the security and salability of 
those interests. In so far as the remedies are the creation of the 
law, and are subject to amendment or withdrawal, the interests 
which the remedies serve partake of the nature of privilege, and 
taxes on those interests might by a chain of reasoning be deemed 
taxes on privileges. 

The pursuit of these fascinating possibilities will be left to those 
who care to indulge in it. It is enough for our present purpose to 
disclaim any assumption of perfection or of inherent validity in 
the schematism here employed. The topical headings and their 
order of treatment are chosen solely from considerations of con- 
venience. Though privilege and property are not mutually ex- 
clusive categories, horses and land and ties and rails are different 
from corporate franchises and the right to inherit. Roughly speak- 
ing, taxes on property may be distinguished from taxes on privi- 
leges, even though the two share some common because of vicinage. 

1 For preceding instalments of this discussion see 31 Harv. L. Rev. 321-72 (Jan- 
uary, 1918), Ibid., 572-618 (February, 1918), Ibid., 721-78 (March, 1918) and Ibid., 
932-53 (May, 1918). 

2 31 Harv. L. Rev. 768, note 166. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 235 

This common has already been pointed out in discussing taxes 
on privileges, 3 and there will be occasion to refer to it again. It 
is also to be borne in mind that no exercise of state fiscal power 
can adequately be judged in isolation. The legitimacy of any 
particular demand may depend upon the presence or absence of 
some other or others. But threads must first be spun before they 
can be woven together. If any misapprehensions are permitted 
or fostered by the effort to disentangle in analysis what is inter- 
related in practice, they will, it is hoped, be dispelled by a later 
venture in synthesis. 

The taxes on property here to be considered do not include those 
levied on the property that is carried in interstate commerce and 
offered for sale after reaching its destination. Such taxes, with the 
exception of those which in some fashion discriminate against 
interstate commerce, 4 are not treated as instances of indirect 
encroachment on the realm of federal control. Property in inter- 
state transit 5 and property that has completed its journey 6 present 
the issue of taxability rather than that of valuation. What we 
are here concerned with are the taxes which are confessedly on 
proper subjects of state power, but which are assessed in ways 
that are alleged to exceed that power. The issue is whether the 
subject or the method of assessment shall be regarded as controlling. 
The property taxes which raise this issue are those on property 
which is an instrument of interstate commerce, whether peri- 
patetic like cars and engines or immobile like ties and track. When 
property of an intangible character intrudes itself into the dis- 
cussion, it is because the Supreme Court has chosen to make a 
classification for which it must bear the responsibility. 



On December 15, 1873, m Union Pacific R. R. Co. v. Peniston, 7 
a majority of the Supreme Court rejected the contention that the 
property of the Union Pacific was exempt from state taxation on 
account of the relation of the road to the federal government. 

3 31 Harv. L. Rev. 768, note 166. 

4 See 31 Harv. L. Rev. 572-74. 

5 See editorial note in 26 Harv. L. Rev. 358-60. 

6 Brown v. Houston, 114 U. S. £22, 5 Sup. Ct. Rep. 109 (1885). 

7 18 Wall. (U. S.) 5 (1873). See 31 Harv. L. Rev. 371, note 171. 



236 HARVARD LAW REVIEW 

Three dissenting justices, however, argued that the property itself 
was an agency of the United States, and was therefore as immune 
from state taxation as are the bonds of the United States or the 
operations of the United States Bank. Less than three months 
later, in The Delaware Railroad Tax, 8 Mr. Justice Field indicated 
without objection from any of his colleagues that a state tax on 
the property of an interstate carrier was not a regulation of inter- 
state commerce. From that day forward it has never been seriously 
doubted that a tax on tangible property used as an instrument of 
interstate commerce is not a tax on that commerce. 9 Such disputes 
as we have here to chronicle relate to the propriety of methods 
adopted for assessing that property. 

Mr. Justice Field's remarks about property taxation in The 
Delaware Railroad Tax 10 must be regarded as obiter, since he had 
previously stated that the tax before the court was not a tax on 
property, but one "upon the corporation itself, measured by a 
percentage upon the cash value of a certain proportional part of 
the shares of its capital stock." u It is to be inferred that the tax, 
if one on property, would have been held to be faulty because of 
the method by which the amount of property in Delaware was 
determined. The statute required each company subject to the 
act to pay a tax of one-fourth of one per cent on such proportion 
of the cash value of all its shares as the length of the line in Dela- 
ware bore to the total mileage. It was conceded that the " ratio 
of the value of the property in Delaware to the value of the whole 
property of the company" was considerably "less than that which 
the length of the road in Delaware bears to its entire length." 12 
From this Mr. Justice Field concluded that "a tax imposed upon 
the property in Delaware according to the ratio of the length of 
its road to the length of the whole road must necessarily fall on 
property without the State," 13 and observed that, upon the assump- 

8 18 Wall. (U. S.) 206 (1873). 

9 In 1891 Mr. Justice Gray on page 23 of his opinion in the Pullman case, note 33, 
infra, declared: "It is equally well settled that there is nothing in the Constitution or 
laws of the United States which prevents a State from taxing personal property, 
employed in interstate or foreign commerce, like other personal property within its 
jurisdiction." 

10 Note 8, supra. 

u 18 Wall. (U. S.) 206, 231 (1873). 

u Ibid., 230. 1S Ibid., 231. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 237 

tion that the tax was on property, there would be great difficulty 
in sustaining it. 

The tax was therefore regarded as one "upon the corporation 
itself/' which seems to mean upon the right to exist as a corpora- 
tion. It was sustained on the theory that the state has absolute 
power over its own corporate creatures. After saying that "the 
State may impose taxes upon the corporation as an entity existing 
under its laws, as well upon the capital stock of the corporation or 
its separate corporate property," 14 Mr. Justice Field added that 
"the manner in which its value shall be assessed and the rate of 
taxation, however arbitrary or capricious, are mere matters of 
legislative discretion." 15 In view of the previous indication that 
the caprice of the state would have been curbed, had the tax been 
one on property, this imputation to the state of arbitrary power 
must be confined to the assessment of the franchise. But the sug- 
gested limitation on the power to tax property is predicated, not 
on the commerce clause, but on the position that the state must 
confine its exactions to property within the jurisdiction. 

The two closing paragraphs of the opinion dismiss the objections 
under the commerce clause. That the conclusion is not confined 
to taxes on the franchise is manifest from the final sentence: 

" The exercise of the authority which every State possesses to tax its cor- 
porations and all their property, real and personal, and their franchises, 
and to graduate the tax upon the corporations according to their business 
or income, or the value of their property, when this is not done by dis- 
criminating against rights held in other States, and the tax is not on im- 
ports, exports, or tonnage or transportation to other States, cannot be 
regarded as conflicting with any constitutional power of Congress ." 16 

The tax in question was said to affect commerce among the states 
"just in the same way, and in no other, that taxation of any kind 
necessarily increases the expenses attendant upon the use or 
possession of the thing taxed." " And Mr. Justice Field, though 
he had dissented in State Tax on Railway Gross Receipts, 1 * decided 
twelve months earlier, quotes with approval from the opinion in 
that case to the effect that "it is not everything that affects com- 



" 18 WaU. (U. S.) 231 (1873). 15 Ibid. 

18 Ibid., 232. Italics are. author's. 17 Ibid. 

18 15 WaU. (U. S.) 284 (1872). See 31 Harv. L. Rev. 576-77. 



23S HARVARD LAW REVIEW 

merce that amounts to a regulation of it, within the meaning of 
the Constitution." 19 

Of course the majority judges in the Gross Receipts case could 
find no fault with taxing property employed in interstate commerce. 
That case, it will be remembered, sustained a tax levied directly 
on gross receipts. One of the grounds adduced by the majority 
was that the receipts were a fund actually in the hands of the 
corporation, disassociated from the source whence they were 
derived. The artificiality of this conception was exposed by the 
minority at the time, and fourteen years later was recognized by a 
unanimous court. 20 But while the doctrine prevailed, there could 
be no doubt that a state might effectively tax interstate commerce, 
provided it was careful not to impose the tax formally on the 
commerce itself. It is significant, however, that the judges who 
dissented in State Tax on Railway Gross Receipts 21 interposed no 
objection to the statement in The Delaware Railroad Tax 22 that 
the property of an interstate carrier was taxable at its full value. 
The only qualification suggested was that this value must not be 
inflated by the inclusion of elements not local to the taxing state. 
It seemed to be assumed that the valuation could take the form of 
a capitalization of earnings, including those from interstate com- 
merce, for the value of the entire road was fixed by the cash value 
of the shares of capital, which would of course be determined in 
large measure by some estimate of earnings. 

Three years later, in the State Railroad Tax Cases, 23 the propriety 
of this mode of assessment was distinctly affirmed, so far as the 
Fourteenth Amendment was concerned. Mr. Justice Miller pointed 
out that "the visible or tangible property of the corporation . . . 
may or may not include all its wealth." 24 "There may be other 
property of a class not visible or tangible which ought to respond 
to taxation, and which the State has a right to subject to taxa- 
tion." 25 And the method of assessment adopted by Illinois was 
indicated and approved as follows: 

19 is Wall. (U. S.) 293 (1872); quoted in 18 Wall. (U. S.) 206, 232 (1873). 

20 Philadelphia & Southern Mail S. S. Co. v. Pennsylvania, 122 U. S. 326, 7 Sup. Ct. 
Rep. 1118 (1887). 

21 Note 18, supra. n Note 8, supra. 
23 92 U. S. 575 (1876). M Ibid., 602. 

26 Ibid. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 239 

" It is therefore obvious that, when you have ascertained the current 
cash value of the whole funded debt, and the current cash value of the 
entire number of shares, you have, by the action of those who above all 
others can best estimate it, ascertained the true value of the road, all 
its property, its capital stock and its franchises ; for these are all rep- 
resented by the value of its bonded debt and of the shares of its capital 
stock." 26 

The State Railroad Tax Cases 27 did not involve interstate com- 
merce, 28 since the complainants rested their objections wholly on 
other grounds. Not until twelve years later did the commerce 
question come again before the court. It was then decided in 
Western Union Telegraph Co. v. Massachusetts 29 that it was not a 
regulation of interstate commerce to assess the property of an 
interstate telegraph company by taking that proportion of the 
assessable value of the total capital stock which the miles of line 
within the state bore to the total miles of line. Mr. Justice Miller 
distinctly stated that the tax was not one on the franchise of the 
company, which interpretation seemed to be necessary to save 
the tax from being one on a federal instrumentality. "The tax in the 
present case," he said, "though nominally upon the shares of the 
capital stock of the company, is in effect a tax upon that organiza- 
tion on account of property owned and used by it in the State of 
Massachusetts." 30 Inasmuch as the assessable value of the total 
capital stock was based on the market value of the outstanding 
shares, the assessment necessarily took account of earnings. This 
is evident from Massachusetts v. Western Union Telegraph Co., 31 a 
later case between the same parties involving subsequent taxes 
levied under the same statute. For there it appeared that the 
company "admitted its liability to pay a tax on the actual value, 
as stated in its answer, of its real and personal property within the 

26 92 U. S. 605 (1876). 

27 Note 23, supra. 

28 For other cases sustaining the application of the so-called "unit rule" or some 
modification thereof, when interstate commerce was not involved, see Kentucky 
Railroad Tax Cases, 115 U. S. 321, 6 Sup. Ct. Rep. 57 (1885), Marye v. Baltimore & 
Ohio R. Co., 127 U. S. 117, 8 Sup. Ct. Rep. 1037 (1888), Charlotte C. & A. R. Co. v. 
Gibbes, 142 U. S. 386, 12 Sup. Ct. Rep. 255 (1892), and Columbus Southern Ry. 
Co. v. Wright, 151 U. S. 470, 14 Sup. Ct. Rep. 396 (1894). 

29 125 U. S. 530, 8 Sup. Ct. Rep. 961 (1888). 

30 Ibid., 53°, 552. 

31 141 U. S. 40, n Sup. Ct. Rep. 889 (1891). 



240 HARVARD LAW REVIEW 

State," 32 and paid into court the sum so admitted to be due, which 
was less than that held rightfully demanded under the statute. 

On the same day the court also decided Pullman's Palace Car Co. 
v. Pennsylvania, 33 which sanctioned Pennsylvania's method of tax- 
ing the cars that ran in and out of the state during the year. Most 
of the discussion in both the majority and minority opinions was 
concerned with the question whether the cars had a taxable situs in 
the state. The minority insisted that, since no specific cars were 
permanently located there, no cars were taxable. But the majority 
held it proper to estimate the average number of cars and to tax 
such car property, even though no single car stayed still long enough 
to give it a situs within the state. The tax purported to be based 
on a portion of the capital stock, but the court treated it as sub- 
stantially one on the cars as property. 

Surprisingly little was said about the method of assessment, 
which is described in the majority opinion as follows: 

"The mode which the State of Pennsylvania adopted, to ascertain 
the proportion of the company's property upon which it should be taxed 
in that State, was by taking as a basis of assessment such proportion of 
the capital stock of the company as the number of miles over which it 
ran cars within the State bore to the whole number of miles, in that and 
other States, over which its cars were run." u 

Then follows the approving comment: 

"This was a just and equitable method of assessment; and, if it were 
adopted by all the States through which these cars ran, the company 
would be assessed upon the whole value of its capital stock, and no 
more." M 

The validity of this method of assessment was said to have been 
established by the State Railroad Tax Cases 36 and Western Union 
Telegraph Co. v. Massachusetts 37 But the former case raised no 
question under the commerce clause, and in the latter the only 
attention given to the method of assessment was to ascertain 
whether the state had correctly determined the proportion of the 

32 141 U. S. 40, 45, 11 Sup. Ct. Rep. 889 (1891). 

33 141 U. S. 18, 11 Sup. Ct. Rep. 876 (1891). 
84 Ibid., 18, 26. 

86 Ibid. 

38 Note 23, supra. 

37 Note 29, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 241 

total property located in Massachusetts. The fact that the valua- 
tion took account of earnings from interstate commerce was 
neglected. 

It is also neglected in the Pullman case. Mr. Justice Gray's 
opinion for the majority notes that the company had about one 
hundred cars in the state all the time, but does not suggest that 
the value of that number of cars might readily be estimated without 
adopting a method that reaches the business as well as the property 
of the company. Nor do the minority protest on this point. True, 
Mr. Justice Bradley questions whether a proper method of appor- 
tionment has been adopted, and shows that, since Illinois, the state 
in which the corporation was chartered, might tax it on the value 
of its total capital stock, the supposed equitable quality of the tax 
discovered by the majority depends upon an assumption not likely 
to be true. But this protest is one against inequitable and double 
taxation, and is not tied up to the commerce clause. Yet this tax 
had a more direct effect on interstate commerce than those pre- 
viously considered, for its amount varied more directly with 
receipts. Under several of the Pennsylvania statutes the taxes on 
the Pullman Company were measured directly by dividends ; under 
another they were measured by dividends when the dividends were 
six per cent or more on the par value of the capital, and by a valua- 
tion of the capital when the dividends were less. But the opinions 
do not refer to the fact that the result of Pennsylvania's method 
was to reap income from the interstate commerce in which the cars 
were engaged, in excess of a levy on the value of the cars as in- 
dependent chattels. 

Seven months later, however, in Maine v. Grand Trunk Ry. Co., 38 
the subject receives more direct attention. This case has already 
been considered in the section dealing with taxes on privileges, 39 
but it has a bearing on the present topic on account of the inter- 
pretation subsequently put upon it. 40 The majority sustained a 
tax measured by gross receipts estimated to have been earned from 
business within the state, on the ground that the subject taxed was 
a privilege over which the state had complete control and which it 

38 142 U. S. 217, 12 Sup. Ct. Rep. 121 (1891). 

39 31 Harv. L. Rev. 579-80. 

40 See Galveston, H. & S. A. Ry.„Co. v. Texas, 210 U. S. 217, 226, 28 Sup. Ct. Rep. 
638 (1908). 



242 HARVARD LAW REVIEW 

might therefore burden as it pleased. The minority, consisting of 
Justices Bradley, Harlan, Lamar, and Brown, insisted that the tax, 
though called one on the franchise, was in fact one "on the re- 
ceipts of the company derived from international transportation." 41 
Justices Bradley and Harlan had dissented in the Pullman case, in 
which Mr. Justice Brown had not sat, having been appointed to 
the bench after the case had been argued; but Mr. Justice Lamar 
had concurred in that case and also in Western Union Telegraph Co. 
v. Massachusetts, 42 in which Mr. Justice Harlan was with him. 
Mr. Justice Bradley for some reason did not sit in the Western 
Union case, but he was on the bench when The Delaware Railroad 
Tax 43 was decided by a unanimous court. It seems, then, that 
the dissent in the Grand Trunk case is to be attributed, not so 
much to long-standing convictions, as to a new recognition of the 
problem. 

Mr. Justice Bradley's dissent in the Grand Trunk case starts 
with the position that, "whilst the purpose of the law professes 
to be to lay a tax upon the foreign company for the privilege of 
exercising its franchise in the State of Maine, the mode of doing 
this is unconstitutional." u The learned justice here seems to look 
behind the subject taxed, and to attach controlling significance to 
the measure by which the amount of the tax is determined — an 
enterprise which the court had hitherto regarded as beyond its 
province. 45 He insists that the nominal subject is not the actual 
subject. "The tax, it is true, is called a tax on a franchise. It is 
so called, but what is it in fact? It is a tax on the receipts of the 
company derived from international transportation." 46 And the 
cases then adduced as precedents against its constitutionality are 
those in which the res named as the subject of taxation included the 
business of interstate commerce, or receipts therefrom. Had the 
majority taken the same view of what was being taxed, they 
would undoubtedly have agreed that the tax was unconstitutional. 
But they accepted the state's declaration of what it was taxing, 
and thought that a tax on a privilege that the state might with- 

41 142 U. S. 217, 235, 12 Sup. Ct. Rep. 121 (1891). 

42 Note 29, supra. 

43 Note 8, supra. 

44 142 U. S. 217, 231, 12 Sup. Ct. Rep. 121 (1891). 

45 See 31 Harv. L. Rev. 334 ff. 

46 142 U. S. 217, 235, 12 Sup. Ct. Rep. 121 (1891). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 243 

hold could not be a regulation of interstate commerce, no matter 
how it was measured. 

Mr. Justice Bradley's position that the measure by which the 
amount of the tax is determined is the controlling test of what is 
actually being taxed is of course as applicable to taxes nominally 
on property as to those nominally on privileges. Indeed, since 
there has never been ascription to the state of arbitrary power over 
property, there is more reason for scrutinizing assessments of 
property than assessments of franchises. Mr. Justice Bradley does 
not seem to make any distinction between the two. Yet it is possi- 
ble that his objections are leveled chiefly against the cumulation 
of taxes in fact measured by the contributions of interstate com- 
merce, and that he would have acquiesced in the solution of the 
vexed problem that the Supreme Court at the present time seems 
to be working towards. 
The learned justice concludes his opinion as follows: 
"Then it comes to this: A State may tax a railroad company upon its 
gross receipts, in proportion to the number of miles run within the State, 
as a tax on its property; and may also lay a tax on these same gross re- 
ceipts in proportion to the same number of miles, for the privilege of 
exercising its franchise in the State. I do not know what else it may not 
tax the gross receipts for. If the interstate commerce of the country is 
not, or will not be, handicapped by this course of decision, I do not un- 
derstand the ordinary principles which govern human conduct." 47 

And earlier, in describing the situation resulting from the case and 
its predecessors, he had said: 

"A corporation, according to this class of decisions, may be taxed 
several times over. It may be taxed for its charter; for its franchises; 
for the privilege of carrying on its business; it may be taxed on its capital, 
and it may be taxed on its property. Each of these taxations may be 
carried to the full amount of the property of the company. I do not 
know that jealousy of corporate institutions could be carried much 
further." 48 

This dissenting note of lament and sympathy deserves attention 
from those who love to insist that the Supreme Court has been 
overzealous in shielding corporations from their just burdens. Its 
interest for our immediate purpose, however, lies in its indication 

47 142 U. S. 217, 235-236, 12 Sup. Ct. Rep. 121 (1891). 

48 Ibid. 



244 HARVARD LAW REVIEW 

of the possibility that what caused Mr. Justice Bradley most 
concern was the cumulation of taxes on the same economic interest, 
rather than the fact that interstate commerce did not escape 
entirely from giving sustenance to the states. It shows, too, the 
recognition that every tax may depend for its justification on the 
absence of certain other possible taxes. No just solution of 
the complex problem raised by alleged conflicts between state 
taxing power and the necessary freedom of interstate commerce 
can be reached if the state is not required to let its right hand 
knbw what its left hand doeth. 

II 

From the foregoing review it appears that for two decades the 
Supreme Court had been allowing states to impose taxes that from 
an economic standpoint were levied more or less directly on receipts 
from interstate commerce. In all this time, however, none of the 
opinions had indicated clearly that the court knew exactly what it 
was doing and was prepared to support its decisions by accurate 
and detailed analysis of the economics of the matter. The judges 
were engaged in the task of finding what subjects of taxation were 
interstate commerce itself, and what were something else. They 
assumed that a tax on a subject not itself interstate commerce 
could not be a regulation of that commerce; and they were prone 
to indulge in nominalism and conceptualism in finding what was 
the subject taxed. In State Tax on Railway Gross Receipts 49 and 
in Osborne v. Mobile, 50 they took positions that they later aban- 
doned. 51 They seemed to be feeling their way in the dark. From 
1894 on, however, the issues are more clearly recognized and more 
adequately discussed. 

In Cleveland, C, C. &St. L. R. Co. v. Backus?- Mr. Justice Brewer 
leaves no doubt as to what the majority of the court think about 
the propriety of assessing railroad property so as to include the 
value of the interstate commerce in which the road is engaged. 
This case and a companion one 53 had to do with Indiana statutes 

49 Note 18, supra. 60 16 Wall. (U. S.) 479 (1872). 

61 The former in Philadelphia & Southern Mail S. S. Co. v. Pennsylvania, note 20, 
supra; the latter in Leloup v. Mobile, 127 U. S. 640, 8 Sup. Ct. Rep. 1380 (1888). 

62 154 U. S. 439, 14 Sup. Ct. Rep. 1122 (1894). 

63 Pittsburgh, C. C. & St. L. Ry. Co. v. Backus, 154 U. S. 421, 14 Sup. Ct. Rep. 
1114 (1894). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 245 

which, while not requiring the tax commissioners to assess railroad 
property on the basis of its earnings, clearly permitted them to do 
so. And it was quite evident that they had done so, for one road 
was valued at $6,000 per mile less than another, and the assessment 
of a previous year under the method then prevailing was nearly 
trebled under the new statute. The decision in the two cases is 
that value is a matter of fact for the assessors to determine, and 
that the court will not upset that determination unless it is fraudu- 
lent. But the opinion in the Cleveland case unequivocally approves 
of the position that the value in fact is what the road would sell for, 
that this depends on the earnings, and that therefore the earnings 
may and should be considered in estimating that value. 

"The rule of property taxation," says Mr. Justice Brewer, "is 
that the value of the property is the basis of taxation." 54 "It does 
not mean," he adds, "a tax upon the earnings which the property 
makes, nor for the privilege of using the property, but rests solely 
upon that value." 55 Then he states what value is: 

"But the value of property results from the use to which it is put and 
varies with the profitableness of that use, present and prospective, actual 
and anticipated. There is no pecuniary value outside of that which re- 
sults from such use. The amount and profitable character of such use 
determines the value, and if property is taxed at its actual cash value it 
is taxed upon something which is created by the uses to which it is put." 56 

The opinion then goes on to gay that "in the nature of things it is 
practically impossible — at least in respect to railroad property — 
to divide its value, and determine how much is caused by one use 
to which it is put and howmuch by another." 57 The learned justice 
asks whether an interstate bridge, the value of which depends 
entirely on interstate commerce, must "on that account be entirely 
relieved from the burden of state taxation." 58 He assumes two 
such bridges, one between two large centers of population and the 
other between two hamlets, and inquires whether they must be 
valued at the same amount, in spite of the fact that one is obvi- 
ously worth much more than the other. "Will it be said that the 
taxation must be based simply on the cost, when never was it held 

" 154 U. S. 439, 445, 14 Sup. Ct. Rep. 1122 (1894). 
68 Ibid., 439. 446. 



246 HARVARD LAW REVIEW 

that the cost of a thing is the test of its value?" 59 It is a practical 
impossibility to "eliminate all of the value which flows from the 
use, and place the assessment at only the sum remaining." 60 
There are only two alternatives. "Either the property must be 
declared wholly exempt from state taxation or taxed at its value, 
irrespective of the causes and uses which have brought about such 
value." 61 

Of course Mr. Justice Brewer's conclusion is not so ineluctable 
as he seems to think. The value for purposes of state taxation need 
not be the economic exchange value. While railroad property is 
merged in the business in which it is engaged, since it has no feasible 
alternative uses, this is not true of all property, and by resort to 
hypothesis a separation can be made of the value of the property 
of a railroad from that of the business which it serves. The fact 
that it may be difficult or impossible to express the results mathe- 
matically with any degree of accuracy does not prevent some 
compromise between the two alternatives which Mr. Justice 
Brewer regarded as the only ones conceivable. Such a compromise 
the court has been compelled to make time and again in finding 
"fair value" for purposes of rate regulation. 62 And the same 
compromise might have been made in finding value for purposes 
of taxation. When the court declines to do so, it is guided by 
considerations of policy, whether it is aware of the fact or not. 

Mr. Justice Brewer plainly invokes considerations of policy 
when he declares: 

"And the uniform ruling of this court, a ruling demanded by the har- 
monious relations between the States and the national government, has 
affirmed that the full discharge of no duty entrusted to the latter re- 
strains the former from the exercise of the power of equal taxation upon 
all private property within its territorial limits. All that has been 
decided is that, beyond the taxation of property, ... no state shall 
attempt to impose the added burden of a license or other tax for the 
privilege of using, constructing, or operating any bridge, or other 
instrumentality of interstate commerce, or for carrying on of such 
commerce." M 

69 154 U. S. 439, 446, 14 Sup. Ct. Rep. 1122 (1894). 
60 Ibid. 61 Ibid. 

62 See Robert L. Hale, "The Supreme Court's Ambiguous Use of 'Value' in Rate 
Cases," 18 Col. L. Rev. 208. 

63 154 U. S. 439, 446, 14 Sup. Ct. Rep. 1122 (1894). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 247 

Here the position seems to be that what the commerce clause in- 
hibits is the cumulation of taxes on interstate commerce. But the 
cumulation denounced does not include taxes on the franchise to be 
a corporation or to employ corporate powers in local business. 
Whether taxes on such privileges may be imposed in addition to 
taxes on property is left uncertain. But there is no uncertainty as 
to the elements that may be considered in assessing property: 

"It is enough for the State that it finds within its borders property 
which is of a certain value. What has caused that value is immaterial. 
It is protected by state laws, and the rule of all property taxation is the 
rule of value, and by that rule property engaged in interstate commerce 
is controlled the same as property engaged in commerce within the 
State." M 

This, of course, is because the court chooses to have it so. The 
wisdom of their choice is not here disputed. But the effort to show 
that the choice does not result in burdening interstate commerce 
cannot receive the same approval. It is difficult to agree that the 
assessment of property by reference to the earnings of the business 
to which the property is devoted is not "an attempt to do by 
indirection what cannot be done directly — that is, to cast a burden 
on interstate commerce." 65 An accountant would hardly be satis- 
fied with the argument that "it comes rather within that large 
class of state action, like certain police restraints, which, while 
indirectly affecting, cannot be considered as a regulation of inter- 
state commerce, or a direct burden on its free exercise." 66 Even a 
rhetorician might find the argument a concession that the state 
may do indirectly what it is forbidden to do directly. If we are 
interested primarily in what happens, and only secondarily in what 
words are used to justify or condemn it, we observe little, if any, 
difference between a tax on receipts and a tax on property assessed 
on a basis of receipts. When a court holds that taxes on property 
may be measured by receipts from interstate commerce or a capitali- 
zation thereof, it allows a state to regulate interstate commerce, no 
matter what name may be affixed to the state action. In any 
factual sense, this regulation is still a regulation even though it is 

64 154 U. S. 439, 446-47, 14 Sup. Ct. Rep. 1122 (1894). 
66 Ibid., 439, 447- 
86 Ibid. 



248 HARVARD LAW REVIEW 

abundantly justified by the demands of the " harmonious relations 
between the states and the national government." 

The dissent in these two Indiana cases added nothing to what 
Mr. Justice Bradley had said in the Pullman case. Justices Bradley 
and Lamar were no longer on the bench. Only Justices Harlan and 
Brown remained of those who had disapproved of the Pullman case. 
They dissent also in the Indiana cases, Mr. Justice Harlan writing 
a brief opinion devoted chiefly to the contention that Indiana had 
taxed property which had no situs there. He insists that "the 
board had no authority to impart to the value of railroad track 
and rolling stock, within the State, any part of the company's 
various interests and property without the State." 67 With this the 
majority do not disagree. They deny that the state has done so. 
They say that the value of the property within the state is en- 
hanced by the fact that it is used in connection with other property 
without the state. "Each state," says Mr. Justice Brewer, "is 
entitled to consider as within its territorial jurisdiction and subject 
to the burdens of its taxes what may perhaps not inaccurately be 
described as the proportionate share of the value flowing from the 
operation of the entire mileage as a single continuous road." 68 
This he treats as a question distinct from that of whether receipts 
may be used as a test of the value of property. To this latter ques- 
tion Mr. Justice Harlan devotes no argument, although the general 
language of his opinion indicates disagreement on this point as well 
as on the one that he specifically discusses. 

Two years later in Western Union Telegraph Co. v. Taggart 69 
the doctrine of the Indiana cases was re-affirmed by an undivided 
court. The opinion of Mr. Justice Gray consists largely of quota- 
tions from previous opinions. It says that " the cost of the property, 
or of its replacement, is by no means a true measure of its value," 70 
and adds that previous authorities have established that the com- 
missioners had the right and the duty, in estimating the value of 
the property within the state, to take into consideration the fran- 
chises granted to the company by sister states, the United States 
and foreign countries. Plainly a valuation of property by reference 

67 154 U. S. 421, 438, 14 Sup. Ct. Rep. 1114 (1894). 

68 154 U. S. 439, 444, 14 Sup. Ct. Rep. 1 1 22 (1894). 
89 163 U. S. i, 16 Sup. Ct. Rep. 1054 (1896). 

70 Ibid., 1, 28. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 249 

to its earnings includes the value of all the franchises that help to 
make the earnings possible. 

It now seemed to be firmly established that the state could tax 
receipts from interstate commerce, provided it did so by using those 
receipts as a measure of the value of property. But the battle 
royal was yet to come. Before considering the next phase, however, 
mention should be made of two decisions which have a bearing on 
later developments. Both were rendered in 1895. Br™ Railroad v. 
Pennsylvania 11 allowed a state to tax a railroad on tolls received from 
other carriers for the use of its line, even though the lessee carrier 
used the road largely for interstate commerce. The tax was directly 
on the tolls, but the court held in substance that the tolls were 
received as rent and not for carriage, and cited for the constitu- 
tionality of the exaction the Maine case, the Indiana cases, and 
Postal Telegraph Co. v. Adams, 12 decided four months earlier. 

The Postal case sustained a tax on an interstate telegraph com- 
pany assessed at one dollar for each mile of line, which tax was in 
lieu of all other state, county, and municipal taxes. The company 
insisted, and Justices Brewer and Harlan agreed with it, that the 
tax was on the privilege of doing business, and was therefore void 
as a regulation of interstate commerce and an interference with a 
federal instrumentality. But the majority of the court thought that 
the tax, though called a privilege tax, was in substance one on 
property, and as such was free from fault. "In marking the dis- 
tinction between the power over commerce and municipal power," 
observed Chief Justice Fuller, "literal adherence to particular 
nomenclature should not be allowed to control construction in 
arriving at the true intention and effect of state legislation." 73 
Since the charge, though in the form of a franchise tax, was 
"arrived at with reference to the value of its property within the 
State and in lieu of all other taxes," 74 it was held not to amount to 
a regulation of interstate commerce. This case did not involve 
taxes measured by receipts and is therefore not pertinent to the 
problem of valuation. Its relevancy to the present discussion lies 
in its indication that taxes in lieu of property taxes will receive the 

71 158 U. S. 431, 15 Sup. Ct. Rep. 896 (1895). Mr. Justice Harlan alone dissented. 

72 155 U. S. 688, 15 Sup. Ct. Rep. 268 (1895). 

73 Ibid., 688, 700. 
» Ibid. 



250 HARVARD LAW REVIEW 

same consideration that is bestowed on taxes directly on property, 
and that the validity or invalidity of any particular tax complained 
of may be dependent on the role it plays in the entire fiscal system 
of the state. 

Ill 

In all but one of the cases thus far considered, the property which 
has been regarded as the subject of taxation consisted of railroad, 
telephone or telegraph lines and their accoutrements. By far the 
greater part of such property is indissolubly annexed to the business 
in which it is engaged. This is true even of the rolling stock of a 
railroad, if we have in mind the railroad business in its entirety. 
Nevertheless a practical distinction immediately suggests itself 
between valuing the tangible property of telephone and telegraph 
companies on the basis of income, and applying the same rule to 
the cars of the Pullman Company. If the Pullman company sold 
its business, but retained its cars, the cars would not become value- 
less. Undoubtedly they would be worth less than their reproduc- 
tion cost, if we assume that they have no market as ministers to 
luxury. They would fall in value to the cost of the less gaudy and 
expensive coaches which carry the multitude. But the right of 
way and tracks of a railroad, and the equipment of telegraph and 
telephone companies would suffer far more from being disassociated 
from the business which they serve. There is a genuine practical 
difficulty in valuing this species of property divorced from the 
profitableness of the uses to which it is put — a difficulty immeas- 
urably greater than that presented by the carriages of the Pullman 
company. 76 This difference, however, was overlooked by the 

75 In Pullman's Palace Car Co. v. Central Transportation Co., 171 U. S. 138, 18 
Sup. Ct. Rep. 808 (1898) the Supreme Court had comparatively little difficulty in 
fixing a rule for the valuation of palace cars which excluded from consideration all 
elements of value derived from the receipts of the business in which they were used. 
This case was a suit to recover the value of property delivered under an ultra vires 
contract. The court was urged to consider the market value of the shares of the 
transferring corporation in determining the value of the property transferred, but it 
refused to do so, Mr. Justice Peckham declaring: "The market price of the shares 
of stock in a manufacturing corporation includes more than the mere value of the 
property owned by it, and whatever is included in that price beyond and outside 
of the value of its property is a factor which in a case like this cannot be taken 
into consideration in determining the liability of the cross defendant. . . . The 
probable prospective capacity for earnings also enters largely into market value, and 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 251 

minority as well as the majority in Pullman's Palace Car Co. v. 
Pennsylvania,™ in which attention was fixed almost exclusively on 
the question whether the cars had a taxable situs in the state. 

In Adams Express Co. v. Ohio State Auditor, 11 however, the matter 
was more fully threshed out. This case sustained Ohio's applica- 
tion of the unit rule to the taxation of interstate express companies. 
The real estate of these companies was separately appraised, and 
this appraised value was deducted from the assessment of the 
company's "entire property" within the state. The statute set 
forth no explicit instructions for the appraisal of this "entire prop- 
erty," but the companies were required to report the value of their 
total capital stock, their entire gross receipts, their gross receipts 
from business done in Ohio, and the length of the lines of rail and 
water routes over which they did business in Ohio and elsewhere. 
From this and other data the board was to "arrive at the true value 
in money of the entire property of said companies within the State 
of Ohio, in the proportion which the same bears to the entire prop- 
erty of said company, as determined by the value of the capital 
stock thereof, and the other evidence and rules as aforesaid." 78 
For the most accurate statement of what the board did we must 
go to the brief of Mr. Maxwell in behalf of the companies: 

" . . . it is manifest that what the board did . . . was not to assess 
the defendants on the basis of the market value of such of their tangible 
property as was found within the State of Ohio, and on their moneys and 
credits within the State, but to treat the companies as owning dividend 
producing plants, whose value is represented by the market value of their 
shares, and to assign a portion of that value to the State of Ohio, as being 
property subject to taxation in that State. The basis of apportionment 

future possible earnings again depend to a great extent upon the skill with which the 
affairs of the company may be managed. These considerations, while they may enhance 
the value of the shares in the market, yet do not in fact increase the value of the 
actual property itself. . . . We must therefore take the property that actually was 
transferred and determine its value in some other way than by this resort to the 
market price of the stock" (pages 154-56). 

It should be noted that a year before this opinion was rendered, the court fhad 
forsaken the notion that these state taxes measured by the unit rule were imposed 
on tangible property alone, and had announced the doctrine that it was the intangible 
property of the company that was thus being valued. 

76 Note 2>2>, supra. 

77 165 U. S. 194, 17 Sup. Ct. Rep^. 305 (1897). 

78 Ibid., 194, 197- 



252 HARVARD LAW REVIEW 

made by the board to Ohio is not disclosed; it was evidently hap-hazard 
and arbitrary." 79 

Or, as was argued later, "the assessments, while purporting to 
be upon the property of the plaintiffs within the State, are, in fact, 
levied upon the plaintiffs' business (which is largely interstate com- 
merce), by placing a fictitious and artificial value upon that prop- 
erty." 80 The result was that wagons, horses, pouches, etc., which 
one of the companies valued at $23,400, were assessed at $499,- 
377.60, if that was the property being taxed. 

It is difficult to escape from the characterizations of the tax 
presented in the briefs against its constitutionality. Certainly the 
value of the horses, wagons, etc., "would be precisely the same" 
and they "could be bought for the same price — be sold for the 
same price — be produced and reproduced for the same price — 
whether the capital stock of the company was 50 per cent below par 
or 100 per cent above par." 81 It is true also that "under this 
method of valuation, whether the horses were lame or sound, or 
old or young, whether the wagons and harness were old or new, was 
of little consequence." 82 Nor does there seem any valid answer 
to the position that: 

"To say that this sort of detached and fugitive property, simply be- 
cause it is employed in the business of an organized express company, is 
unit property, like a railroad or a telegraph, is only another way of .at- 
tempting to justify an assessment against the business of a company, 
under the pretense of assessing its property." ^ 

As the brief of Mr. James C. Carter puts it: "The property which, 
according to the notion under criticism, is taxed, is a pure abstrac- 
tion having no situs, no existence, even, save in intellectual con- 
ception, something which can nowhere be seen or handled or made 
the subject of action." 84 Later Mr. Carter enumerates the ele- 
ments which determine the market value of the shares, and con- 
tends that a tax on those elements is a tax on the occupation itself. 

79 165 U. S. 194, 204-05, 41 L. Ed. 686-687 (1897). 

80 Ibid., 194, 205, Ibid., 687. 

81 Ibid., 194, 215, Ibid., 692. 

82 Ibid. 

83 41 L. Ed. 687 (1897). This excerpt is not contained in the abstract of Mr. Max- 
well's brief given in the official reports. 

84 41 L. Ed. 693 (1897). Not in the official reports. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 253 

These contentions of attorneys for the companies seem incon- 
trovertible. Any realistic approach to the genuine issue must con- 
cede their validity. If such a tax is to.be sustained, it must be 
because the states can tax interstate commerce, provided they do 
it in approved ways. But the majority position seems poetical 
rather than realistic. "Doubtless there is a distinction," says 
Chief Justice Fuller, "between the property of railroad and tele- 
graph companies and that of express companies." 85 The learned 
justice recognizes that "the physical unity existing in the former 
is lacking in the latter"; but he discounts the importance of this 
difference by saying that "there is the same unity in the use of the 
entire property for the specific purpose, and there are the same 
elements of value arising from such use." 86 After pointing out 
that "the cars of the Pullman Company did not constitute a physi- 
cal unity, and their value as separate cars did not bear a direct 
relation to the valuation which was sustained in that case," 87 he 
continues : 

"No more reason is perceived for limiting the valuation of the prop- 
erty of express companies to horses, wagons and furniture, than that of 
railroad, telegraph and sleeping car companies, to roadbed, rails and 
ties, poles and wires, or cars. The unit is a unit of use and management, 
and the horses, wagons, safes, pouches and furniture, the contracts for 
transportation facilities, the capital necessary to carry on the business, 
whether represented in tangible or intangible property, in Ohio, pos- 
sessed a value in combination and from use in connection with the prop- 
erty and capital elsewhere, which could as rightfully be recognized in the 
assessment for taxation in the instance of these companies as the 
others." 88 

That such value exists is clear. Whether it should rightfully be 
recognized as a basis for the assessment of state taxes is a question 
of policy. No criticism is here directed against the judgment that 
"the States through which the companies operate ought not to be 
compelled to content themselves with a valuation of separate pieces 
of property disconnected from the plant as an entirety, to the 
proportionate part of which they extend protection, and to the 
dividends of whose owners their citizens contribute." 89 But when 

85 165 U. S. 194, 221, 17 Sup. Ct. Rep. 305 (1897). 

86 Ibid. « Ibid. 

88 Ibid. 

89 Ibid., i94,'227. 



254 HARVARD LAW REVIEW 

it is insisted that "the taxation is essentially a property tax, and, 
as such, not an interference with interstate commerce," 90 the 
matter is not so clear. Tfyis value which the items have in combina- 
tion and from their use is mainly the value of the combination and 
the use, and in small part that of the items. And the combination 
and the use are largely in interstate commerce. The dividends 
to which Ohio citizens contribute are dividends from interstate 
as well as intra-state business. The tax is a tax on interstate com- 
merce, and we shall not escape confusion until we recognize it. 
The dissenting opinion of Mr. Justice White recognizes the point, 
. but does not dwell upon it. Attention is devoted chiefly to the 
contention that the tax is on elements of value not located in the 
state. It is rightly asserted that extra-state values were taken 
account of in making the assessment. From this is drawn the 
following conclusion: 

"I reiterate, therefore, that the rule which recognizes that for the pur- 
pose of assessing tangible property in one State you may take its full 
worth and then add to the value of such property a proportion of the 
total capital stock, is a rule whereby it is announced that the sum of all 
the property, or an arbitrary part thereof, situated in other States, may 
be joined to the valuation of property in one State for the purpose of 
increasing the taxation within that State." 91 

This sentence, isolated from its context, has the vice of not recog- 
nizing that values in the taxing state were included in the total, 
and that the total was then divided in proportions according to a 
plan that assumed to allocate to the taxing state only, that part 
which rightfully belonged to it. The state certainly adds some- 
thing to the value of the tangible property within the state, but it 
does not necessarily add extra-state elements by pooling all values 
in all the states, and then dipping out the portion which it regards 
as the contribution of the taxing state. It is by neglecting the 
division which follows the addition that Mr. Justice White is con- 
vinced that "it cannot be said that this vast excess does not em- 
brace property situated outside of Ohio, when both the text of the 
statute of that State and such text as expounded by the Supreme 
Court of the State clearly show that the sum of the excess is arrived 

90 165 U. S. 194, 226, 17 Sup. Ct. Rep. 305 (1897). 

91 Ibid., 194, 240-41. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 255 

at by adding to the property in the State the value of property 
situated outside thereof." 92 

This neglect, however, is logically legitimatized in Mr. Justice 
White's opinion, because of his insistence that the tangible property 
of the express companies in Ohio is not part of anything that can 
be regarded as a unit. If what you add from without the state is 
unrelated to what you are taxing within the state, the subsequent 
division, though it may lessen, does not obliterate the evil. The 
soundness of the dissenting position that Ohio is taxing values in 
other jurisdictions depends upon the assumption that the Ohio 
property of express companies is not part of a unit, or upon the fact 
that more of the whole is assigned to Ohio than rightly belongs to it. 
Both positions are relied on by the minority. With the second we 
are not here concerned. 93 The majority recognize fully that there 
may be an unjustifiable apportionment which serves to draw to 
Ohio values domesticated elsewhere. Certain kinds of property 
are not distributable. But the existence of such property, they 
say, is not to be assumed. "It is for the companies to present any 
special circumstances which may exist, and, failing their doing so, 
the presumption is that all their property is directly devoted to 
their business, which being so, a fair distribution of its aggregate 
value would be upon the mileage basis." 94 The majority opinion 
concludes by saying : 

"We have said nothing in relation to the contention that these valua- 
tions were excessive. The method of appraisement prescribed by the law 
was pursued and there were no specific charges of fraud. The general 
rule is well settled that 'whenever a question of fact is thus submitted to 
the determination of a special tribunal, its decision creates something 
more than a mere presumption of fact, and if such determination comes 
into inquiry before the courtsit cannot be overthrown by evidence going 
only to show that the fact was otherwise than as so found and deter- 
mined.'" 95 

92 165 U. S. 194, 248, 17 Sup. Ct. Rep. 305 (1897). 

93 This is considered in 31 Harv. L. Rev. 772-75. For cases requiring the state to 
amend the apportionment of interstate values, see Fargo *. Hart, 193 U. S. 490, 24 
Sup. Ct. Rep. 498 (1904); Louisville & N. R. Co. v. Greene, 244 U. S. 522, 37 Sup. 
Ct. Rep. 683 (1917), and Illinois Central R. Co. v. Greene, 244 U. S. 555, 37 Sup. Ct. 
Rep. 697 (1917). 

94 165 U. S. 194, 227, 17 Sup. Ct, Rep. 305 (1897). 

95 Ibid., 194, 229. 



256 HARVARD LAW REVIEW 

The major issue in the case was the propriety of the rule of assess- 
ment prescribed, rather than the correctness of the particular 
application. The validity of the rule depends upon a judgment as 
to the rightfulness of ever including earnings from interstate com- 
merce in assessments for state taxation and upon the subordinate 
inquiry whether the unit rule is suitable to the property of express 
companies. The first inquiry had been answered in prior decisions. 
The second only was novel, and that was novel in form rather than 
in substance. 

Whether the horses and wagons of an express company are in- 
tegral parts of a larger unit depends upon whether you like to think 
of them that way. Mr. Justice White does not. "What unity can 
there be," he asks, "between the horses and wagons of an express 
company in Ohio with those belonging to the same company situ- 
ated in the State of New York?" 96 To this, the majority reply 
that there is a unity of use and management. To the writer, the 
answer seems a bit of deceptive word painting. Mr. Justice White 
says that it "in reality declares that a mere metaphysical or in- 
tellectual relation between property situated in one State and 
property found in another creates as between such property a close 
relation for the purpose of taxation." 97 Though he dislikes the 
application of the unit rule to railroad and telegraph property, he 
holds that it "is necessarily predicated upon the physical connec- 
tion of such property," 98 and insists that it cannot be extended to 
situations where the unity is not physical. He denies that the cars 
of the Pullman Company were regarded as items in a unit, and 
contends that the issue with respect to them was solely whether 
they had a taxable situs in Pennsylvania, and that the statement 
that the method of assessment applied to them was "just and 
equitable" was made "with reference to the facts held to exist in 
the case before the court." 99 On those particular facts, he finds 
that the tax in that case was not excessive. 

The discussion of "relations," physical and metaphysical, might 
easily carry us to realms where flight for a lawyer is precarious. 
A physicist would hardly abandon the search for a continuum as 
soon as he lost the nexus of iron rails. We are told by many meta- 

96 165 U. S. 194, 250, 17 Sup. Ct. Rep. 305 (1897). 

97 Ibid. 98 Ibid , 99 Ibid , 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 257 

physicians that all relations are intellectual. Whether any posited 
unity is imaginary or real can provoke endless debate. But these 
alluring problems can be dismissed as not germane to the present 
controversy. Since any application of the unit rule which uses as a 
base the value of total capital stock necessarily imposes taxation on 
a capitalization of earnings, it seems futile to argue whether a unity 
of "use and management" differs from a physical unity. The fact 
that the tangible property of the express companies in Ohio had an 
independent, easily assessable value makes it less easy to conceal 
the fact that the express business was being taxed. But the dis- 
guise seems apparent enough in the case of railroads and telegraphs. 
There is no denying that part of Mr. Justice White's opinion which 
says that it cannot be "contended that the tax here involved is not 
a tax on interstate commerce, in view of the fact that, from the 
nature of the criteria of value adopted, an aliquot part of the avails 
and receipts of the company of every kind is added to the taxing 
value in the State of Ohio." 10 ° There is but one answer to the 
query he propounds : 

"How, I submit, can it now be announced that there is an imaginary 
unity between personal property widely separated because that property 
has a common owner, without, at the same time, reversing the settled 
adjudications of this court on the subject of the power of a State to tax 
the earnings from interstate commerce? " 101 

The answer is that the taxing of such earnings is accomplished in a 
different way from the ways previously declared unconstitutional. 
Whether the difference makes a difference is another question. 
The court's way out of such difficulties is to distinguish between 
direct and indirect burdens on interstate commerce. But such 
distinctions have to be fortified by something more than affixing 
labels. Not infrequently the labels are masks for changed views 
of policy. Yet in many cases they express substantial differences 
of effect. Whether they do in the present instance will be con- 
sidered later. 

The opinion of Chief Justice Fuller hardly touches the question. 
But the case did not end here. The attorneys for the companies 
presented a petition for a rehearing, fortified by elaborate argu- 

100 165 U. S. 194, 248-49, 17 Sup. Ct. Rep. 305 (1897). 

101 Ibid., 194, 251-52. 



258 HARVARD LAW REVIEW 

ment. They concede the propriety of assessing railroad, telephone 
and telegraph companies by the unit rule, for the reason that there 
is no other feasible method of finding the value of property of this 
nature. But horses and wagons, they say, have an easily ascer- 
tainable pecuniary value. They are worth no more to an express 
company than to anyone else. It is improper to impute to them 
the earnings of the business in which they are used, for they might 
be dispensed with and the earnings still continue. By hiring others 
to care for local deliveries, and by renting furniture, etc., instead 
of owning it, the express companies might divest themselves of all 
that Ohio purported to tax, and could still carry on the business 
with substantially equal success. The small amount of the tangible 
property in Ohio contributes almost nothing to the values which 
Ohio has assessed against it. 102 

To this, Mr. Justice Brewer, in denying the motion for a re- 
argument, 103 answers that what Ohio was taxing was not alone 
the tangible property of the company in Ohio, but the intangible 
as well. 104 He does not appear to insist that the Ohio legislature 

102 The petition for a rehearing is printed, apparently in full, in 166 U. S. 185, 186-217 
and 41 L. Ed. 966-76. 

103 Adams Express Co. v. Ohio State Auditor, 166 U. S. 185, 17 Sup. Ct. Rep. 604 
(1897). 

104 Mr. Justice Miller had previously regarded taxes assessed by the unit rule as 
taxes on intangible property in State Railroad Tax Cases, note 23, supra. Seepage 
238, 239, supra. In these cases, however, the interstate commerce question 
was not raised. On the same day that the opinion denying a rehearing in the Adams 
Express case was handed down, the court rendered two other decisions involving the 
same point. 

Adams Express Co. v. Kentucky, 166 U. S. 171, 17 Sup. Ct. Rep. 527 (1897) sus- 
tained what purported to be a tax on the franchises of the company, measured in the 
same way as the Ohio taxes. Since the Adams Express Co. was a joint-stock com- 
pany without any corporate franchise, the minority contended that, even if the doc- 
trine of the Ohio cases were accepted, it did not apply here, because the only franchise 
that could be conceived of as the subject of taxation was one to be inferred from the 
proposition that the right to do interstate commerce in Kentucky resulted from the 
assent of the state, and that such a proposition was obviously opposed to the settled 
course of decision. Some reliance, too, was placed on the fact that the Ohio tax was 
at the rate of $250 per mile while the Kentucky tax was at the rate of $764 per mile. 
The majority, however, called the tax in effect one on intangible property, Chief 
Justice Fuller observing: "We agree with the Circuit Court that it is evident that the 
word 'franchise' was not employed in a technical sense, and that the legislative inten- 
tion is plain that the entire property, tangible and intangible, of all foreign and domestic 
corporations, and all foreign and domestic companies possessing no franchise, should 
be valued as an entirety, the value of the tangible property be deducted, and the value 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 259 

realized the fact. The point is introduced by saying that the 
argument on behalf of the companies that their horses, wagons, 
etc., constitute their only property in Ohio "practically ignores 
the existence of intangible property, or at least denies its liability 
tor taxation." 105 "To ignore this intangible property," continues 
the opinion, "or to hold that it is not subject to taxation at its 
accepted value, is to eliminate from the reach of the taxing power a 
large portion of the wealth of the country." 106 The learned justice 
points out the existence of an excess of value over that of tangible 
property, and asks: "What gives this excess of value?" 107 The 
answer is that it is "obviously the franchises, the privileges the 
company possesses — its intangible property." 108 

This is not to be quarreled with, but what perplexes is the task 
of reconciling this with the earlier statement that "no state can 
interfere with interstate commerce through the imposition of a 
tax, by whatever name called, which is in effect a tax for the privi- 
lege of transacting such commerce." 109 What Mr. Justice Brewer 
seems to regard as a resolution of the difficulty seems to the writer 
nothing but a contradiction of the earlier statement. That state- 
ment was given as the repeated affirmation of the court. It is 
followed by the sentence: "And it has as often been affirmed that 
such restriction on the power of a State to interfere with interstate 
commerce does not in the least abridge the right of a State to tax at 

of the intangible property thus ascertained . . . should be assessed on the basis of 
their lines within and without the State." (166 U. S. 150, 180.) 1 

Henderson Bridge Co. v. Kentucky, 166 U. S. 150, 17 Sup. Ct. Rep. 532 (1897), 
sustained a similar tax on that part of the intangible property of a company owning 
an interstate bridge which was deemed to be within Kentucky. Chief Justice Fuller 
declared that the tax clearly was not on the interstate business carried on over the 
bridge, because the bridge company did not transact any such business, it being 
carried on by others who paid tolls for the use of the bridge, thus bringing the case 
within Erie Railroad v. Pennsylvania, note 71, supra. Mr. Justice White distin- 
guished the Erie case because the railroad there involved lay wholly within the limits 
of a single state. The pith of his dissent is as follows: "It being beyond dispute, 
therefore, that the sum of taxation in this case was fixed almost exclusively by the 
gross earnings from interstate commerce, who, may I ask, can point out the distinction 
between taxing the gross earnings derived from interstate commerce and taxing a 
valuation based on such earnings?" (166 U. S. 150, 165). 

The division of opinion in these two cases was the same as that in the Ohio cases. 

105 166 U. S. 185, 218, 17 Sup. Ct. Rep. 604 (1897.) 

106 Ibid., 185, 219. 

107 Ibid., 185, 220. 108 Ibid. 
109 Ibid., 185, 218. 



260 HARVARD LAW REVIEW 

their full value all the instrumentalities used for such commerce." no 
The contradiction plainly appears when it is said that intangible 
property is taxable and that "it matters not in what this intangible 
property consists — whether privileges, corporate franchises, con- 
tracts or obligations." m 

The rest of Mr. Justice Brewer's opinion consists of forceful 
argument why this intangible property should be taxed for what 
it is actually worth. "Substance of right demands that whatever 
be the real value of any property, that value may be accepted by 
the State for the purpose of taxation, and this ought not to be 
evaded by any mere confusion of words." 112 Accumulated wealth, 
it is said, will laugh at the crudity of tax laws which reach only 
tangible property and ignore that which is intangible. 113 After 
pointing out that the tangible property of the Adams Express 
Company was valued at about $4,000,000, while its stock would 
sell for over $16,000,000, Mr. Justice Brewer continues: 

"But what a mockery of substantial justice it would be for a corpora- 
tion, whose property is worth to its stockholders for the purpose of income 
and sale $16,800,000, to be adjudged liable for taxation upon only one 
fourth of that amount. The value which property bears in the market, 
the amount for which its stock can be bought and sold, is the real value. 
Business men do not pay cash for property in moonshine or dreamland. 
They buy and pay for that which is of value in its power to produce in- 
come, or for purposes of sale." 114 

With this let us cordially agree. Ohio was not venturing into 
moonshine or dreamland to find the value which it taxed. If its 
method of apportionment was just, it was not venturing outside of 
Ohio. 115 But its excursion into the realm of the intangible was an 

110 166 U. S. 185, 218, 17 Sup. Ct. Rep. 604 (1897). 

111 Ibid., 185, 219. 
m Ibid,, 185, 221. 

113 Ibid. 

114 Ibid., 185, 222. 

116 On the situs of this property without location, Mr. Justice Brewer said: "Where 
is the situs of this intangible property? Is it simply where the home office is, where is 
found the central directing thought which controls the workings of the great machine, 
or in the State which gave it its corporate franchise; or is that intangible property 
distributed wherever its tangible property is located and its work is done? Clearly, 
as we think, the latter. . . . But the franchise to be is only one of the franchises of 
a corporation. The franchise to do is an independent franchise, or rather a combina- 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 261 

entry into the field of interstate commerce, and the Supreme Court 
would have done well to recognize it more frankly and to find a 
way to justify it that breathed none of the atmosphere of that 
moonshine and dreamland which is referred to as the bourne in 
which business men do not invest. 

Such justification is by no means difficult. The brief of Mr. 
Carter on behalf of the express companies gave the court a clue to 
the most solid of reasons for sustaining the tax which that brief 
condemned. For Mr. Carter was a jurist as well as an advocate. 
And in the present instance he analyzed the problem for us most 
helpfully. The basis for the general doctrine of the immunity of 
interstate commerce from state taxation, he states as follows: 

"There is no constitutional provision in terms forbidding the States 
to impose burdens by way of taxation upon interstate commerce. The 
prohibition is a necessary implication arising from the fact that the sub- 
ject-matter is one placed exclusively under the sovereign control of Con- 
gress, and the imposition of burdens upon it by the States, whether by 
taxation or otherwise, would be a denial of that sovereignty and false 
assumption by the States of a power over it, which, if it existed, might be 
so exercised as to destroy it." 116 

And then he adds the significant qualification: 

"There is one necessary exception to the rule that the States cannot 
tax interstate commerce. Inasmuch as the existence of the States is 
necessary to the existence of interstate commerce, that ordinary system 
of taxation which is necessary to the existence of the States, namely, 
taxation upon all property within them, must be permitted, and the 
property employed in interstate commerce is not to be exempted. This 
exception is, indeed, rather apparent than real; for where no burden can 
be put upon property employed in interstate commerce without being 
at the same time put upon all other property, interstate commerce is not 
really burdened. Were it not subject to taxation in this form the effect 
would be to confer upon it an affirmative advantage equivalent to a 
pecuniary bounty equal to the amount of the tax from which it is 
exempted." 117 

tion of franchises, embracing all things which the corporation is given power to do, 
and this power to do is as much a thing of value and a part of the intangible property 
of the corporation as the franchise to be. Franchises to do go wherever the work is 
done." (166 U. S. 185, 223-24). 

116 165 U. S. 194, 217, 41 L. Ed. 694 (1897.) 

ur Ibid., 194, 217-18. 



262 HARVARD LAW REVIEW 

Manifestly, what is true of property used in interstate commerce 
is equally true of business that is interstate commerce. If such 
business is exempted from burdens which local business has to bear, 
it is thereby given a bounty to the extent of the exemption. Mr. 
Carter's point is that a tax is not a burden on interstate commerce 
unless it discriminates against that commerce. It would probably 
be safer to say that such burden on interstate commerce as non- 
discriminatory taxation may impose is not sufficiently serious to be 
accounted a regulation. Such taxation is forbidden by no explicit 
language in the Constitution. The exemption of interstate com- 
merce from state taxation arises by implication only, and the im- 
plication should not be carried to the point of compelling the states 
to confer positive benefits on interstate commerce by discrimina- 
tions in its favor. 

Mr. Carter apparently appreciated the applicability of his con- 
cession to taxes on business, for he hastens to add that "a tax in any 
other form [than a tax on property] cannot be thus equalized over 
all private interests, and, if allowed, would be, or might easily be 
made to be, an especial burden." 118 Here is the crucial difficulty 
in the problem. In Ohio, express companies were taxed on the basis 
of their income-producing capacities, while many other businesses 
were assessed on a less onerous basis. Was there not therefore 
necessarily a discrimination against the express companies and the 
interstate commerce which they carried on? In one sense, of course, 
there is always discrimination, wherever there is difference of treat- 
ment. The requirement of absolute uniformity is, however, utterly 
impracticable. The rule of "reasonable classification" which the 
court has been compelled to adopt in applying the equal-protection 
clause 119 seems necessary also in passing upon issues of alleged 
discrimination raised under other constitutional clauses. But 
the Express cases were wisely decided only if they can be brought 
within the rule of reasonable classification. 

The theories of both the majority and the minority avoided explicit 
analysis of this element in the situation. Chief Justice Fuller quoted 
a portion of the opinion of the state court which made the point 
that the earning capacity of real estate determines its assessable 

U8 165 U. S. 194, 218, 41 L- Ed. 694 (1897). 
ut See Missouri v. Lewis, 101 U. S. 22 (1879). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 263 

value. 120 But the tax in question was not on the real estate of the 
express companies, for that was assessed separately, and the assess- 
ment then deducted from the value of the "total property" deter- 
mined by the use of the unit rule. Mr. Justice White's dissenting 
opinion touches upon what ought to be the determining element in 
the case, when it points out that if the unit rule is good for express 
companies, it ought also to be applied to bankers and merchants. 
But this is adduced in support of the contention that the tax is not 
confined to tangible property within the state but falls also on all 
kinds of property without the state. That the assessment on the 
express companies greatly exceeded "the true value in money" of 
their tangible chattels within the state was fully recognized in the 
opinion denying a rehearing, in which this excess was called the 
intangible property of the company. What should then have been 
discussed was the question whether the intangible property of the 
express companies was taxed no more heavily than that of others. 
The answer to the question depends upon whether similar busi- 
ness taxes were imposed on other businesses. Only by a general 
state-wide income tax can differences of treatment be avoided. 
And Ohio had no general income tax. Certainly the intangibles 
of the express companies were discriminated against in favor of 
intangibles enjoyed by many other businesses. But the doctrine 
of reasonable classification ought to go far enough to say that it is 
not necessary to treat express companies in the same way as other 
businesses that come into no competition with them. It can hardly 
be called a discrimination against interstate commerce to tax express 
companies more heavily than farmers. On the other hand, express 
companies may suffer if merchants escape what they must endure. 
An increase in the cost of interstate transportation by taxation of 
express companies may well reduce the volume of that kind of 
interstate commerce to the resulting increase of sales over the 
counters of local merchants. The Ohio tax on express companies 
might discriminate against interstate commerce even though 
similar taxes were imposed on all engaged in any form of trans- 
portation, intra-state or interstate. But the court was excused 
from considering these possibilities in dealing with the Ohio cases, 
since they were not specifically pressed and supported by evidence. 

120 165 U. S. 194, 225, 17 Sup. Ct. Rep. 305 (1897). 



264 HARVARD LAW REVIEW 

It may well insist that the complainants are under the same burden 
to establish the existence of discrimination as to show flaws in the 
rule of apportionment. But it does not appear that the materiality 
of the point was recognized. 

This of course does not establish that the cases were unwisely 
decided. A court cannot insist on an ideal system of state taxation, 
if such a thing can exist outside the minds of the doctrinaire. A 
rough approximation to fair treatment of interstate commerce is 
all that can reasonably be required. It does not appear that the 
interstate business of express companies was in any way discrimi- 
nated against in favor of any direct competitor engaged solely in 
local carriage. Such discrimination against interstate commerce 
as the entire taxing system of the state may have resulted in, was 
probably remote, indirect, and practically negligible. The Ohio 
taxes and others like them seem to have spared the express com- 
panies and their interstate business for other foes to devour. What 
Mr. Justice Brewer has to say about the possibility that the deci- 
sion may open the door to injustice through the conflicting action 
of different states applies as well to the possibility that Ohio had 
laid a heavier hand on some interstate commerce than on some that 
was local. "Such possibilities," he says, "do not equal the wrong 
which sustaining the contention of the appellant would at once 
do." 121 Fine spun theories about possible discrimination may be 
dismissed in the same way that Mr. Justice Brewer deals with what 
he calls fine spun theories about situs in the paragraph with which 
he closed his opinion: 

"In conclusion, let us say that this is eminently a practical age; that 
courts must recognize things as they are and as possessing a value which 
is accorded to them in the markets of the world, and that no fine spun 
theories about situs should interfere to enable these large corporations, 
whose business is carried on through many States, to escape from bearing 
in each State such burden of taxation as a fair distribution of the actual 
value of their property among those States requires." 122 

But a practical age demands not only practical decisions but 
practical opinions to support them. The distinction between the 
intangible property of an interstate carrier and its franchises and 
business and receipts is that the intangible property, as Mr. Justice 

121 166 U. S. 185, 225, 17 Sup. Ct. Rep. 604 (1897). m Ibid. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 265 

Brewer estimates it, is a conception that embraces the economic 
value of all the elements from which it is distinguished. For all 
his professed practicality, Mr. Justice Brewer reaches his goal by- 
arbitrary categories and by distinctions in nomenclature which are 
not distinctions in reality. In escaping from the difficulties in- 
herent in the notion that chattels are necessarily worth a capitaliza- 
tion of what may be earned by their use, even though they are easily 
divorced from that use and though substitutes for the use are readily 
available, the learned justice gets into new difficulties by insisting 
that a tax on the value of an interstate business is any the less a 
tax on that business because it is called a tax on intangible property. 
Had the Supreme Court recognized the Ohio tax on express com- 
panies for what it really was, and held that Ohio could not apply 
this method of assessment to any interstate business unless it also 
applied similar methods to all other businesses, we might not have 
had to wait so long for the beginnings of the fiscal reform that dis- 
regards intangibles as a subject of taxation and looks to income as 
the best expression of the values thus disregarded, and therefore 
as the most satisfactory and equitable subject from which to derive 
the necessary funds for governmental purposes. 

{To be continued.) 

Thomas Reed Powell. 

Columbia University. 



374 HARVARD 1 LAW REVIEW 



INDIRECT ENCROACHMENT ON FEDERAL 

AUTHORITY BY THE TAXING POWERS 

OF THE STATES. 1 VI 

II. Regulations of Interstate Commerce (continued) 

2. Taxes not Discriminating Against Interstate Commerce (continued) 

C. Taxes on Acts, Occupations, or Income. 

/ T A HIS study has now reached a point where the remaining cases 
•*• can most profitably be considered under the somewhat omni- 
bus rubric chosen for this section. We have seen that the Supreme 
Court has not been meticulous in inquiring whether the statute 
under which a tax is imposed calls it a tax on property or on a fran- 
chise or on capital stock or "on the corporation itself." If a rose 
by another name would smell sweeter, it has sometimes been re- 
christened and found sweet enough to accept. "Literal adherence 
to particular nomenclature should not be allowed to control con- 
struction in arriving at the true intention and effect of state 
legislation," 2 observed Chief Justice Fuller in a passage already 
quoted. 3 In spite of the rule that earnings from interstate commerce 
may not be taxed directly, such earnings have been accorded recog- 
nition in assessing the amount of taxes on privileges or property. 
Most of the cases have dealt with valuations that regarded a capi- 
talization of net earnings. 4 But Maine v. Grand Trunk Railway 

1 For preceding instalments of this discussion see 31 Harv. L. Rev. 321-72 (January, 
1018); Ibid., 572-618 (February, 1918); Ibid., 721-78 (March, 1918); Ibid., 932-53 
(May, 1918); and 32 Harv. L. Rev. 234-65 (January, 1919). 

2 Postal Telegraph Cable Co. v. Adams, 155 U. S. 688, 700, 15 Sup. Ct. Rep. 268 

(1895). 

8 32 Harv. L. Rev. 249. 

4 The Delaware Railroad Tax, 18 Wall. (U. S.) 206 (1873), 32 Harv. L. Rev. 236; 
Western Union Telegraph Co. v. Massachusetts, 125 U. S. 530, 8 Sup. Ct. Rep. 961 
(1888), 32 Harv. L. Rev. 239; Massachusetts v. Western Union Telegraph Co., 141 
U. S. 40, n Sup. Ct. Rep. 889 (1891), 32 Harv. L. Rev. 239; Pullman's Palace Car 
Co. v. Pennsylvania, 141 U. S. 18, 11 Sup. Ct. Rep. 876 (1891), 32 Harv. L. Rev. 240; 
Cleveland, C, C. & St. L. Ry. Co. v. Backus, 154 U. S. 439, 14 Sup. Ct. Rep. 11 21 
(1894), 32 Harv. L. Rev. 244; Pittsburgh, C. C. & St. L. Ry. Co. v. Backus, 154 U. S. 
421, 14 Sup. Ct. Rep. 1 1 14 (1894), 32 Harv. L. Rev. 248; Western Union Telegraph 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 375 

Co., 5 Erie Railroad v. Pennsylvania 6 and Henderson Bridge Co. v. 
Kentucky 7 accepted the measure of gross earnings, some or all of 
which were from interstate commerce. 

To an untutored mind, taxes measured by gross earnings are a 
form of income taxes; and from now on it will be convenient to 
treat them as such, no matter by what name courts or legislatures 
may choose to call them. It will help towards seeing things as 
they are, if we emulate the attitude of Mr. Justice Holmes in his 
illuminating essay on "The Path of the Law," 8 in which, in order 
to point to the distinction between law and morals, he looks to the 
mental and emotional processes of the "bad man." For our pur- 
poses we may invoke that more estimable person whom we know 
as the "business man." This pecuniary creature will think that 
he is taxed on his income when his tax varies directly with the ups 
and downs of his income, even though judges and scholars may as- 
sure him that he is taxed on something entirely different. He will 
be primarily interested in knowing when and why such a tax must 
be paid and when and why it can be escaped. He will care less 
what such a tax is called by those versed in legal niceties than what 
its effect will be on his balance sheet. To him, at least, we may look 
for forgiveness for such imperfect coordination as may be indulged 
in by treating together all taxes measured by income, whether they 
are formally taxes on income or taxes on occupations, franchises or 
property. 

For a decade after the Ohio Express cases, 9 there was compara- 
tive quiet among those subjected to taxes that took account of 
earnings from interstate commerce. Parke, Davis & Co. v. Roberts 10 
sustained a tax on that part of the capital stock of a foreign cor- 
poration which was regarded as employed within the state, although 

Co. v. Taggart, 163 U. S. 1, 16 Sup. Ct. Rep. 1054 (1896), 32 Harv. L. Rev. 248; 
Adams Express Co. v. Ohio State Auditor, 165 U. S. 194, 17 Sup. Ct. Rep. 305 (1897), 
166 U. S. 185, 17 Sup. Ct. Rep. 604 (1897), 32 Harv. L. Rev. 251; Adams Express 
Co. v. Kentucky, 166 U. S. 171, 17 Sup. Ct. Rep. 527 (1897), 32 Harv. L. Rev. 258, 
note 104. 

6 142 U. S. 217, 12 Sup. Ct. Rep. 121 (1891), 31 Harv. L. Rev. 579-80, 32 Harv. L. 
Rev. 242. 

6 158 U. S. 431, 15 Sup. Ct. Rep. 896 (1895), 32 Harv. L. Rev. 249. 

7 166 U. S. 150, 17 Sup. Ct. Rep. 532 (1897), Ibid., 258, note 104. 

8 10 Harv. L. Rev. 457-78. 

9 Adams Express Co. v. Ohio St?te Auditor, note 4, supra. 
10 171 U. S. 658, 19 Sup. Ct. Rep. 58 (i* 



376 HARVARD LAW REVIEW 

the corporation was engaged partly in interstate commerce and the 
tax was graduated according to the annual dividends. Mr. Justice 
White did not sit, and Justices Harlan and Brown dissented; but 
their objections were confined to what they regarded as a dis- 
crimination against interstate commerce because the tax was im- 
posed only on corporations not "wholly engaged" in business 
within the state. 11 

In 1900 the court unanimously sustained a tax on the total capi- 
tal stock of a domestic corporation owning an interstate bridge, 
which was in addition to a tax on its tangible property. 12 Three 
years later Western Union Telegraph Co. v. Missouri 13 sanctioned 
Missouri's application of the unit rule to the property of the West- 
ern Union within the state. Mr. Justice Brewer concurred only 
in the result, and Justices White and Peckham dissented; but 
whether on the main point of the case or on the subordinate one 
that a complaint against discriminatory overvaluation cannot be 
raised in an action at law, does not appear, as there is no dissenting 
opinion. 

Meanwhile other cases had sanctioned assessments of property 
employed in interstate commerce, which did not take account of 

11 The majority recognized that "if the object of the law in question was to impose 
a tax upon products of other States while exempting similar domestic goods from taxa- 
tion, there might be room to contend that such a distinction was constitutionally- 
objectionable as tending to affect or regulate commerce between the States" (171 
U. S. 658, 662, 19 Sup. Ct. Rep. 58). But the tax was said not to be directly on the 
articles brought into the state or on their sale, nor on property in other states. It was 
conceded that the tendency of the law might be "to encourage manufacturing corpora- 
tions which seek to do business in that State to bring their plants into New York" 
(Ibid., 665); but the absence of any distinction between domestic and foreign cor- 
porations was thought to cure any evil lurking in this design. 

The majority cannot be said to have dealt satisfactorily with the contentions of 
the minority. Mr. Justice Shiras refers to the Ohio Express cases and others to show 
"the distinction between corporations organized to carry on interstate commerce, 
and having a quasi-public character, and corporations organized to conduct strictly 
private business" (Ibid.). The drug concern before the court was said to come 
within the doctrine of Paul v. Virginia, 8 Wall. (U. S.) 168 (1869), and Horn 
Silver Mining Co. v. New York, 143 U. S. 305, 12 Sup. Ct. Rep. 403 (1892), and 
therefore to be subject to the arbitrary power of the state with respect to any 
exaction on its local business. This ground of the decision is now completely 
undermined by Looney v. Crane Co., 245 U. S. 178, 38 Sup. Ct. Rep. 85 (1917), 31 
Harv. L. Rev. 601-18. 

12 Keokuk & Hamilton Bridge Co. c. Illinois, 175 U. S. 626, 20 Sup. Ct. Rep. 205 
(1900). 

13 190 U. S. 412, 23 Sup. Ct. Rep. 730 (1903). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 377 

earnings. Two of these were Colorado 14 and Utah 15 assessments 
of refrigerator cars, which determined by count the average number 
of cars within the state and fixed a valuation of $250 per car. Two 
were ad valorem assessments of interstate bridges. 16 Western Union 
Telegraph Co. v. New Hope 17 and Atlantic & Pacific Telegraph Co. 
v. Philadelphia 18 sanctioned license fees on telegraph companies 
based on the number of poles and of miles of wire, in spite of the 
fact that it was conceded that the exactions might yield some sur- 
plus over the cost of supervision on which the license was pro- 
fessedly based. The state and municipal requirements sustained in 
these cases make it clear that it is not necessary to measure property 
taxes by a capitalization of earnings. Since it is feasible to assess 
cars and bridges and telegraph lines in ways that do not make the 
tax vary with the income from their use, it is difficult to contest the 
position that taxes based on a valuation of capital stock or on divi- 
dends or gross receipts are in substance a species of income taxes. 
The sublimation by which earnings are transmuted into a valuation 
of capital stock need not deceive us. 

I. Taxes Measured by Gross Receipts. 

There is no dispute that gross receipts from interstate commerce 
are not taxable directly as such. 19 The Supreme Court will not 
swallow a gross-receipts pill unless it is fiction-coated. Our task 
is to discover what coating is necessary to make it palatable. In 
the section on taxes on privileges we have already dealt with Maine 
v. Grand Trunk Railway Co., 20 which sustained a gross-receipts 

14 American Refrigerator Transit Co. v. Hall, 174 U. S. 70, 19 Sup. Ct. Rep. 599 
(1899). 

15 Union Refrigerator Transit Co. v. Lynch, 177 U. S. 149, 20 Sup. Ct. Rep. 631 
(1900). 

16 Pittsburgh, C. C. & St. L. Ry. Co. v. Board of Public works, 172 U. S. 32, 19 Sup. 
Ct. Rep. 90 (1898); Henderson Bridge Co. v. Henderson City, 173 U. S. 592, 19 Sup. 
Ct. Rep. 553 (1899). 

17 187 U. S. 419, 23 Sup. Rep. 204 (1903). 

18 190 U. S. 160, 23 Sup. Ct. Rep. 817 (1903). 

19 Fargo v. Michigan, 121 U. S. 230, 7 Sup. Ct. Rep. 857 (1887); Philadelphia & 
Southern Mail S. S. Co. v. Pennsylvania, 122 U. S. 326, 7 Sup. Ct. Rep. 1118 (1887); 
Western Union Telegraph Co. v. Alabama Board of Assessment, 132 U. S. 472, 10 Sup. 
Ct. Rep. 161 (1889); Western Union Telegraph Co. v. Texas, 105 U. S. 460 (1881). 

20 142 U. S. 217, 12 Sup. Ct. Rep. 1.21 (1891), 31 Harv. L. Rev. 579-80, 32 Harv. L. 
Rev. 241. 



378 HARVARD LAW REVIEW 

tax nominally on the privilege of exercising corporate franchises 
within the state. The theory of the majority was that the measure 
of the tax did not matter, as the state had absolute and arbitrary 
power over such privileges as it might in its discretion grant or 
withhold. In 1910 this theory was abandoned, 21 so that the Maine 
case must now find some other leg to stand on or must fall. We 
shall see that the necessary prop was supplied 22 two years before 
the original foundation was destroyed. 

At the same term in which the Maine case was decided, Ficklen 
v. Shelby County Taxing District 23 sustained a gross-receipts tax 
without the justification of arbitrary power over corporate privi- 
leges. The tax was not in terms on the gross receipts and thus was 
distinguished by the majority from taxes levied on receipts from 
interstate commerce "as such." Mr. Justice Harlan was the only 
one to dissent. He insisted that receipts from interstate commerce 
cannot be included in the measure of any tax on an occupation. He 
professed to believe that his eight colleagues would have agreed 
with him, had the Taxing District expressly required that a license 
to do a general commission business should be withheld until the 
applicant had paid a percentage of his gross commissions from inter- 
state sales during the preceding year. The different method which 
had been adopted was characterized as "a very clever device to 
enable the Taxing District of Shelby County to sustain its govern- 
ment by taxation upon interstate commerce." 24 

This so-called "device" took the form of a requirement that all 
who desired to do business as general brokers, etc., should take out 
a license, pay a fee of $50, and in addition pay ten cents for every 
$100 of capital invested in the business, or, in the absence of such 
invested capital, give a bond conditioned on the payment of two 
and one half per cent on the gross commissions during the year for 
which the license was desired. Complainants had no capital. 
They had given the required bond. It chanced that the business of 
Ficklen during the year 1887 had consisted entirely of negotiating 
interstate sales, and that nine-tenths of the sales and commissions 

21 Western Union Telegraph Co. v. Kansas, 216 U. S. 1, 30 Sup. Ct. Rep. 190 (1910); 
Pullman's Palace Car Co. v. Kansas, 216 U. S. 56, 30 Sup. Ct. Rep. 232 (1910). 

22 In Galveston, H. & S. A. Ry. Co. v. Texas, 210 U. S. 217, 28 Sup. Ct. Rep. 638 
(1908), considered infra, 385, et seq. 

23 145 U. S. 1, 12 Sup. Ct. Rep. 810 (1892). 
84 Ibid., 28. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 379 

of the other complainant had been interstate. Both sought a 
license for the ensuing year without fulfilling the obligation as- 
sumed in the bond given the preceding year. The court found that 
the subject taxed was the privilege of doing a general brokerage 
business, including intra-state as well as interstate, and that it was 
therefore taxable. It recognized that a different question would 
have arisen if the complainants "had not undertaken to do a 
general commission business, and had taken out no licenses therefore, 
but had simply transacted business for non-resident principals." 25 
Here obviously is the simple case of a tax on local business, 
measured by gross receipts from all business, with the only addi- 
tional element that this measure of receipts was to be used only in 
case the business was done without capital. Had the complainants 
seen fit to employ $100 of capital, they would have paid ten cents 
each instead of a percentage of their receipts. This element in the 
case was accorded weight, for Chief Justice Fuller remarked: 

"We presume it would not be doubted that, if the complainants 
had been taxed on capital invested in the business, such taxation would 
not have been obnoxious to constitutional objection; but because they 
had no capital invested, the tax was ascertained by reference to the 
amount of their commissions, which when received were no less their 
property than their capital would have been." 26 

It is to be noted, however, that this observation appears in the 
final paragraph of the opinion, and that the preceding discussion 
conveys no hint that the tax on the gross receipts would not have 
been quite as proper if it had not been the alternative of a tax on 
capital. After quoting from Mr. Justice Bradley's opinion in 
Philadelphia & Southern M. S. S. Co. v. Pennsylvania 27 that "the 
corporate franchises, the property, the business, the income of 
corporations created by a State may undoubtedly be taxed by the 
State," 28 Chief Justice Fuller adds that "this of course is equally 
true of the property, the business, and the income of individual 
citizens of a State." 29 And later, after discussing Maine v. Grand 
Trunk Railway Co., 30 he declares: 

25 145 U. S. 24, 12 Sup. Ct. Rep. 810 (1892). 

26 Ibid., 24. 27 Note 19, supra. 

28 122 U. S. 326, 345, 7 Sup. Ct. Rep. 1118 (1887), quoted in 145 U. S. 1, 22, 12 Sup. 
Ct. Rep. 810 (1892). 

29 Ibid. 80 Note 20, supra. 



380 HARVARD LAW REVIEW 

"Since a railroad company engaged in interstate commerce is liable 
to pay an excise tax according to the value of the business done in the 
State, ascertained as above stated, it is difficult to see why a citizen 
doing a general business at the place of his domicil should escape pay- 
ment of his share of the burdens of municipal government because the 
amount of his tax is arrived at by reference to his profits." 31 

The Chief Justice insists that "this tax is not on the goods or on 
the proceeds of the goods, nor is it a tax on nonresident mer- 
chants," 32 and then invokes the familiar and convenient slogan 
that "if it can be said to affect interstate commerce in any way it is 
incidentally, and so remotely as not to amount to a regulation of 
such commerce." 33 

By this decision Shelby County appears to have achieved in- 
directly what it would be forbidden to attain directly. It used 
receipts on which it could not impose a tax as the measure of a tax 
on something else. It was on the nature of that something else 
that the court fixed its attention. Had the county declared that no 
business at all might be done without a license, a broker would then 
come within the fangs of the law by doing interstate commerce 
alone, and the tax would have been held to be one on a subject that 
is interstate commerce itself. 34 But here it was the broker, and not 
county, that wrapped interstate and local commerce in the same 
package. The Chief Justice admonishes Mr. Ficklen that he has 
only himself to blame for his predicament, since he asked for a 
license to do a "general" business, and did not restrict his pro- 
fessions to interstate business. 

"The tax was not laid on the occupation or business of carrying on 
interstate commerce, or exacted as a condition of doing any particular 
commission business; and complainants voluntarily subjected themselves 
thereto in order to do a general business." 35 

31 145 U. S. i, 24, 12 Sup. Ct. Rep. 810 (1892). 

32 Ibid., 24. 
ss Ibid., 24. 

M Robbins v. Shelby County Taxing District, 120 U. S. 489, 7 Sup. Ct. Rep. 592 
(1887); Leloup v. Port of Mobile, 127 U. S. 640, 8 Sup. Ct. Rep. 1380 (1888); Crutcher v. 
Kentucky, 141 U. S. 47, 11 Sup. Ct. Rep. 851 (1891); Williams v. Talladega, 226 U. S. 
404, 33 Sup. Ct. Rep. 116 (191 2); Barrett v. New York, 232 U. S. 14, 34 Sup. Ct. Rep. 
203 (1914). In all but the first of these the complainant was engaged in local as well 
as interstate commerce, and was therefore taxable under a statute or ordinance 
properly drawn. 

35 145 U. S. i, 22, 12 Sup. Ct. Rep. 810 (1892). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 381 

Thus the court preserved the fiction that interstate commerce 
cannot be taxed, and contented itself with rinding that the "subject " 
on which the burden was imposed was not interstate commerce and 
in holding that therefore a tax on that subject is not a. tax on inter- 
state commerce. 

The next gross-receipts taxes to come before the court were ones 
imposed by North Dakota on the Northern Pacific Railroad. A 
statute of 1883 provided that "all railroad companies, except 
railroads operated by horse power, owned and operated within the 
territory, should pay two per centum on the gross earnings of their 
railroads for a period of five years, and thereafter three per centum 
on the gross earnings, in lieu of all other taxes upon said railroads 
and the capital stock.thereof ." 36 The law was changed in 1889 so 
as to give the road the option of paying the gross-earnings tax or 
of having its property subjected to ad valorem assessments like those 
on other property in the state. The Northern Pacific accepted the 
Act of 1889, but did not pay in full the gross-earnings tax due in 
that year. Some of its lands were assessed for local taxation, and 
the company brought a bill to enjoin their sale for nonpayment of 
the tax. Relief was denied in Northern Pacific R. R. Co. v. Clark 37 
on the ground that the company had no standing in equity until it 
had paid what was due under one or the other of the two modes of 
assessment. The road had contended that it was liable under 
neither. It argued that by accepting the Act of 1889 it gained 
exemption from ordinary taxation on its lands, and that it was ex- 
cused from paying the gross-receipts tax by reason of the subse- 
quent repeal of the statute under which it was imposed. The court 
held, however, that the Act of 1889 contemplated no exemption 
of any property, but merely offered two optional modes of assess- 
ment of that property. Though the case passed on no constitu- 
tional question, it figures in the family tree of the distinction 
subsequently drawn between taxes on gross receipts in addition 
to other demands and the same taxes as a substitute for other 
impositions. 

Other lands of the railroad had been sold for nonpayment of 
local taxes assessed prior to 1889. These were lands not adjacent 

38 Stated by Mr. Justice Jackson in Northern Pacific R. R. Co. v. Clark, 153 U. S. 
252, 264, 14 Sup. Ct. Rep. 809 (1894). 
87 153 U. S. 252, 14 Sup. Ct. Rep. 809 (1894). 



382 HARVARD LAW REVIEW 

to the right of way, which had been taxed locally on the assump- 
tion that the compulsory gross-earnings tax imposed by the law 
of 1883 was in lieu only of taxation on lands which actually con- 
tributed to the earnings through their use in the business. In 
McHenry v. Alford 38 the receivers of the road brought a bill to 
have the tax deeds declared invalid, since the gross-receipts tax 
had been fully paid. The purchasers defended on the grounds 
that the gross-receipts tax had no bearing on the local taxation of 
lands not adjacent to the right of way and, further, that it was not 
a valid tax and so could not operate to exempt the lands from 
other demands. Neither position was accepted by the court, al- 
though only the first was formally passed upon. As to this it was 
declared that, since the lands not adjacent to the right of way had 
been pledged for the payment of bonds issued to build and equip 
the road, and thus helped to make the earnings possible, their re- 
lation to the road and its operation was such that it was a proper 
classification to include them in all the property of the company 
which was relieved from local assessments and subjected to the 
gross-earnings tax, and that this was what the statute intended. 39 

The court was relieved from the necessity of passing explicitly 
on the question whether the gross-earnings tax was unconstitu- 
tional as a regulation of interstate commerce, because it found 
that the Act of 1889 was in the nature of a compromise which, when 
accepted by the company and complied with to the extent of pay- 
ing all arrearages due under the Act of 1883, operated as an im- 
plied release from any other taxes assessed for any period which 
the gross-earnings tax covered. Nevertheless Mr. Justice Peckham 



38 168 U. S. 651, 18 Sup. Ct. Rep. 242 (1898). 

19 Mr. Justice Peckham said that the language of the Act of 1883 "gives great reason 
to doubt the correctness of the construction which would levy the tax upon the earn- 
ings derived from interstate commerce" (168 U. S. 651, 670). The doubt did not have 
to be resolved, since the company had paid all that had been assessed against it, and 
could not be in a worse position in recovering its lands because of the chance that it 
might have paid more than the legislature had intended to exact. The construction 
of Mr. Justice Peckham is strained and is inconsistent with the declaration in the Act 
of 1889 which reads: "Any company which has not complied with the provisions of 
chapter 99 of the Session Laws of 1883 by paying all taxes claimed on gross earnings, 
both territorial and interstate, or by filing an account of gross earnings, both terri- 
torial and interstate, shall prepare and file such account in the manner therein pro- 
vided . . . and pay one half of the entire amount due. ..." 168 U. S. 651, 656, 18 
Sup. Ct. Rep. 242 (1898). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 383 

intimated rather strongly that the court thought the tax constitu- 
tional. This he did by way of distinguishing it from those declared 
invalid in Fargo v. Michigan 40 and Philadelphia 6* Southern Mail 
S. S. Co. v. Pennsylvania} 1 His comment is as follows: 

" In those cases there was a distinct tax upon the gross earnings with- 
out reference to any other tax, and not in substitution or in lieu of another 
tax, while in this case the act plainly substitutes a different method of 
taxation upon the property of the railroad company. It is a tax upon 
the lands and all the other property of the company, but instead of 
placing a valuation upon the lands and other property, and apportioning 
a certain amount upon such valuation directly, as was the old method, 
a new one is established of taking a percentage upon the gross earnings 
as a fair substitute for the former taxes upon all the lands and property 
of the company, and when it is said, as it is in this act, that the tax col- 
lected by this method shall be in lieu of all other taxes whatever, it 
would seem that it might be claimed with great plausibility that a tax 
levied under such circumstances and by such methods was not in reality 
a tax upon the gross earnings, but was a tax upon the lands and other 
property of the company, and that the method adopted of arriving at 
the sum which the company should pay as taxes upon its property was 
by taking a percentage of its gross earnings." 42 

A gross-earnings tax, then, is a property tax, if it is imposed in 
lieu of a property tax. This sounds somewhat like saying that what 
is exempted is taxed, and what is taxed is not taxed. By a little 
logodasdaly, things are not what they seem to be. Since taxes on 
property measured by receipts are valid, and taxes on receipts are 
not valid, taxes on receipts in lieu of taxes on property must be 
called taxes on property in order to sustain them. North Dakota 
had given to the pertinent section of the law of 1883 the heading: 
"Percentages of gross earnings to be paid in lieu of other taxes." 43 
The Act of 1889, in referring to taxes "due under the assessments 
under said law of 1883," had called them "taxes on both territorial 
and interstate earnings." 44 But the Supreme Court did not see 
its way clear to accept the designation and to declare that taxes on 
receipts from interstate commerce are not regulations of that com- 

40 Note 19, supra. 

41 Note 19, supra. 

42 168 U. S. 651, 671, 18 Sup. Ct. Rep. 242 (1898). 
« Ibid., 654- 

44 Note 39, supra. 



384 HARVARD LAW REVIEW 

merce, provided there is no exemption of intra-state receipts and 
provided further that the tax is in substitution for and not in addi- 
tion to other taxes. This would have been a more direct and 
realistic solution of the issue. It is of course but another way of 
stating the solution actually reached. Whichever way the doctrine 
is stated, there still remains the question whether a gross-receipts 
tax, where there is no property to exempt, would be constitutional 
provided it can be called something else than a tax on receipts from 
interstate commerce "as such." Ficklen v. Shelby County Taxing 
District 45 may be thought to answer the question in the affirmative, 
provided the gross-earnings tax may be called a tax on a local 
"occupation." But the tax sustained in that case, though not in 
lieu of a property tax, was in default of one. We shall consider 
later whether this makes a difference. 

Though the Dakota cases did not definitely pass on the constitu- 
tional question, its final settlement was not long delayed. Wisconsin 
imposed a gross-receipts tax in lieu of other taxes on railroads and 
its demand was sustained in Wisconsin &* M . Ry. Co. v. Powers,* 5 
decided in 1903. The opinion of the court by Mr. Justice Holmes 
was devoted almost entirely to denying the contention that the 
tax violated contract rights of the complainant. The commerce 
question was given this terse answer: 

"We need say but a word in answer to the suggestion that the tax 
is an unconstitutional interference with interstate commerce. In form 
the tax is a tax on ' the property and business of such railroad corpora- 
tion operated within the State,' computed upon certain percentages of 
gross income. The prima facie measure of the plaintiff's gross income 
is substantially that which was approved in Maine v. Grand Trunk 
Railway Co., 142 U. S. 217, 228. See also Western Union Telegraph Co. 
v. Taggart, 163 U. S. i." 47 

The Taggart case was one sustaining a tax measured by the value 
of total capital stock. The Maine case proceeded on a theory of 
absolute power over privileges enjoyed by foreign corporations. 
Neither case is so direct an authority in support of the Wisconsin 
tax as is the decision in the Ficklen case and the strong dictum in 
McHenry v. Alford. 4s 

45 Note 23, supra. 

46 191 U. S. 379, 24 Sup. Ct. Rep. 107 (1903). 

47 Ibid., 387-88. 48 Note 42, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 385 

Reference has already been made 49 to the difference of opinion 
among the judges as to the Texas gross-receipts tax on railroads 
that came before the court in Galveston, H.&S.A. Ry. Co. v. Texas b0 
in 1907. The tax was imposed on all railroads whose lines lay wholly 
within the state, and the amount demanded by the law was a sum 
"equal to one per cent of their gross receipts." This included re- 
ceipts from interstate commerce, since roads whose termini were both 
within the state nevertheless carried passengers and goods destined 
for extra-state points over connecting lines. Mr. Justice Harlan 
for the minority took a position which is in substance in flat contra- 
diction to the one he elaborated in his solitary dissent in the Ficklen 
case. In seeking to distinguish the Pennsylvania gross-receipts 
tax declared unconstitutional in Philadelphia 6 s Southern Mail 
S. S. Co. v. Pennsylvania 51 from the Texas gross-receipts tax before 
the court, he says: 

"Here there is no levying upon receipts as such from interstate com- 
merce. The State only measures the occupation tax by looking at the 
entire amount of the business done within its limits without reference 
to the source from which the business comes. It does not tax any part 
of the business because of its being interstate. It has reference equally 
to all kinds of business done by the corporation in the State. Suppose 
the State as, under its Constitution it might do, should impose an income 
tax upon railroad corporations of its own creation, doing business within 
the State, equal to a given per cent of all income received by the corpora- 
tion from its business, would the corporation be entitled to have excluded 
from computation such of its income as was derived from interstate 
commerce? Such would be its right under the principles announced in 
the present case. In the case supposed the income tax would, under the 
principles or rules now announced, be regarded as a direct burden upon 
interstate commerce. I cannot assent to this view." 52 

The learned dissentient cites no authority for his contention. He 
argues that the operation of the tax "on interstate commerce is 
only incidental, not direct," 53 and points out that the state con- 
stitution authorizes the imposition of occupation taxes on corpora- 
tions and natural persons, and that "the plaintiff in error is a Texas 

49 31 Harv. L. Rev. 583. 

60 210 U. S. 217, 28 Sup. Ct. Rep. 638 (1908). 

61 Note 19, supra. 

62 210 U. S. 217, 429, 28 Sup. Ct. Rep. 638 (1908). 

63 Ibid., 229. 



386 HARVARD LAW REVIEW 

corporation." 54 Then follows the indisputable assertion that "it 
cannot be doubted that the State may impose an occupation tax 
on one of its own corporations, provided such tax does not inter- 
fere with the exercise of some power belonging to the United States." 
The absence of such interference is predicated on the analysis that 
the receipts were not taxed as such, but were merely the measure 
of the tax. 

With Mr. Justice Harlan agreed Chief Justice Fuller and Justices 
White and McKenna. 55 The majority, who held the tax uncon- 
stitutional, consisted of Mr. Justice Holmes, who wrote the opinion, 
and Justices Brewer, Peckham, Day and Moody. At first glance 
this seems a strange alignment, for Mr. Justice Brewer had been 
foremost in sustaining property taxes measured more or less by 
income in part from interstate commerce; and Justices Harlan and 
White had most strenuously opposed such a measure. Occupation 
taxes measured by gross receipts seem to bear much more directly 
on interstate commerce than does a property tax which merely 
takes account of the value contributed by net earnings. The 
mystery may be thought to deepen when we compare the division 
in the Galveston case with that in the Western Union case 56 decided 
two years later. Here Justices Harlan and White return to their 
stand against allowing a state to do indirectly what it is forbidden 
to do directly. Justices Brewer, Day and Moody join them, al- 
though in the Galveston case they were in the opposite camp. 
Justices Holmes and Peckham favor an excise tax measured by 
total capital stock, but oppose an occupation tax measured by 
gross receipts. Only Chief Justice Fuller and Mr. Justice McKenna 
seem to be consistent throughout. They supported the state taxes 
in all the cases in which they sat. 

A closer analysis may resolve some of the perplexity. The op- 
position of Justices Harlan and White to Ohio's application of the 
unit rule to express companies and to the Kansas tax on total 
capital stock is based largely on the conviction that in each case 
the state was reaching after values not attributable to business or 
property within its borders. 57 This opposition is not inconsistent 

" 210 U. S. 228, 28 Sup. Ct. Rep. 638 (1908). 

66 Ibid., 228-29. M Note 21, supra. 

67 See 32 Harv. L. Rev. 254. Chief Justice Fuller and Justices Brewer and Day 
dissented in Fargo v. Hart, 193 U. S. 490, 24 Sup. Ct. Rep. 498 (1904), which upset an 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 387 

with approval of the Texas tax on gross receipts from business 
within the state, where the evil of extraterritoriality is absent. 
Justices Holmes and Peckham based their approval of the Kansas 
tax on the theory of the absolute and unlimited power of a state 
over the local business of a foreign corporation, 58 which precludes 
inquiry into the effect on interstate commerce of an exercise of 
that absolute power. They are at liberty to question the Texas tax, 
since it does not purport to be an excise tax on a privilege completely 
within the power of the state. 

The remaining apparent shifts of opinion demand further ex- 
planation. It may be frankly recognized that the only conceivable 
consistency between Mr. Justice Harlan's disapproval of the Maine 
excise tax and the Shelby County occupation tax, both of which 
were measured by gross receipts, and his approval of the Texas 
occupation tax, similarly measured, is the consistency of dissent. 
Since Mr. Justice Brewer opposed him in all three cases, these two 
jurists may appear to be exemplars of the famous political leader 
who was said to have caught his opponents in bathing and run off 
with their clothes. We hasten to add that the parallel is at most 
an intellectual, and not a moral, one; for such change of habili- 
ments as was effected by the wearers of the ermine was not a theft 
but a swap which appears to have given mutual satisfaction. Mr. 
Justice Brewer's approval of the Maine excise on gross receipts 
and his disapproval of the Texas occupation tax on such receipts 
may be reconciled on the ground that the former had the ostensible 
justification of a tax on a privilege within complete state control. 
But this justification the learned justice withheld from the Kansas 
excise on total capital stock, so that he invites us to seek further 
for his line of thought. This quest leads us to the arguments of 
counsel against the Texas occupation tax and to the acceptance of 
those arguments in the majority opinion in the Galveston case. 

Counsel for the railroad apparently make no effort to distinguish 
the Ficklen case from that before the court This case is naturally 
relied on by the state, but it is not mentioned in the available ab- 
stract of the brief for the road. To the Maine case, however, 

application of the unit rule on the ground that the total capital stock taken as a base 
included the value of a large amount of personal property in other states not used in 
the express business and therefore not contributing to any values located in the state. 
See 31 Harv. L. Rev. 772. 
58 See Ibid., 585-88. 



388 HARVARD LAW REVIEW 

Messrs. Garwood and Everts devote considerable attention. They 
insist that the excise there sustained was like that considered in 
Postal Telegraph Cable Co. v. Adams 59 and McHenry v. Alford; 60 

"that is to say, it was what this court calls a commutation tax levied 
in lieu of all other taxes; and therefore, in its essential nature, a property 
tax, or a means resorted to by the state for ascertaining the entire value 
of the property situated in the state and not otherwise taxed." 61 

As distinguished from such a tax, 

"in the case at bar the state has already assessed and equalized for 
purposes of taxation the properties of the plaintiff in error, and at the 
time of the levy of this tax, and for long years prior thereto, they had 
paid taxes, and were paying taxes, to the state upon the full value thus 
ascertained." 62 

Counsel later seek to restrict the Maine case on grounds which 
apply also to the Ficklen case, though that inconvenient decision 
is not mentioned. They argue as follows : 

"It never was the intention of the justices who concurred in the 
decision in Maine v. Grand Trunk R. Co. ... to hold that a state 
could levy an occupation tax on a corporation engaged in the transporta- 
tion of interstate commerce, or could levy a so-called occupation tax 
on such corporation, and ascertain the amount thereof by a percentage 
on the gross receipts of the interstate and foreign commerce; but in fact 
the tax was there sustained as a property or commutation tax in lieu of 
all other taxation." 63 

It is clear that the Maine case did not sanction an occupation tax 
where the element of an exercise of arbitrary power over the en- 
joyment of corporate privileges was lacking or not relied on. But 
the Ficklen case appeared to do exactly this. In the Ficklen case, 
the opinion was flavored slightly with the thought that the tax was 
sort of a substitute for a property tax; but in the Maine case the 

69 Note 2, supra. In February, 1904, Professor Joseph H. Beale, in criticising the 
ground on which the Maine case was placed by the court, suggested that a " more ten- 
able ground . . . will probably be found in the later case of Postal Telegraph Cable 
Co. v. Adams." See his article on "The Taxation of Foreign Corporations," 17 Harv. 
L. Rev. 248, 263. 

60 Note 38, supra. 

81 52 L. Ed. 1032. 

62 Ibid. 

63 Ibid., 1033. These excerpts from the briefs are not contained in the abstract, 
printed in the official edition of the reports. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 389 

point was not mentioned by either the majority or the minority. 
When we turn, however, to the Maine statute, as printed in the 
margin of the report of the decision, 64 we find that counsel have 
correctly analyzed the nature of the tax imposed. From this it 
appears that all buildings of the road and all land and fixtures out- 
side of its located right of way were taxed locally, and that this tax 
and the excise measured by gross receipts were "in lieu of all taxes 
upon such railroad, its property and stock." 65 The gross-receipts 
tax was the only one levied on account of the rolling stock, the land, 
ties and rails on the right of way, the capital or intangible property 
of the company and the economic interests of the shareholders. 
From the amount thus received by the state, each town in which 
stock of the road was held was to receive an amount equal to one 
per cent on the par value of such stock. 

This view of the Maine case presented by counsel is accepted by 
the majority of the court. Mr. Justice Holmes concedes that the 
case "seems at first sight like a reaction from the Philadelphia and 
Southern Mail Steamship Company case." 66 He adds not over- 
confidently: "But it may not have been." 67 Then he proceeds to 
reinterpret it: 

"The estimated gross receipts per mile may be said to have been made a 
measure of the value of the property per mile. That the effort of the 
State was to reach that value, and not to fasten on the receipts from 
transportation as such was shown by the fact that the scheme of the 
statute was to establish a system. The buildings of the railroad and 
its lands and fixtures outside of its right of way were to be taxed locally, 
as other property was taxed, and this excise with the local taxes were 
to be in lieu of all taxes. The language shows that the local tax was not 
expected to include the additional value gained by the property being 
part of a going concern. That idea came in later. The excise was an 
attempt to reach that additional value. The two taxes together may 
fairly be called a commutation tax." 68 

Then follow references to Postal Telegraph Cable Co. v. Adams 69 
which sustained a privilege tax, assessed at $1 per mile with a 

64 142 U. S. 217, 218, 12 Sup. Ct. Rep. 121 (1891). 

65 Ibid. 

68 210 U. S. 217, 226, 28 Sup. Ct. Rep. 638 (1908). 
« 7 Ibid. 

■ Ibid. 

69 155 U. S. 688, 15 Sup. Ct. Rep. 268 (1895). See 32 Harv. L. Rev. 249. 



390 HARVARD LAW REVIEW 

maximum of $3,000, in lieu of other taxes, as in substance a property 
tax; to the passage in McEenry v. Alford 70 which is quoted on 
page 382, supra; and to a portion of the majority opinion in the 
Ficklen case which said that in the Maine case 

''it was held that the reference by the statute to the transportation 
receipts and to a certain percentage of the same, in determining the 
amount of the excise tax, was simply to ascertain the value of the busi- 
ness done by the corporation, and thus to obtain a guide to a reasonable 
conclusion as to the amount of the excise tax which should be levied." 7l 

Attention should be called to the fact that Mr. Justice Holmes 
did not refer to the page in the opinion in the Ficklen case which 
suggested that the occupation tax might be regarded as a sub- 
stitute for a property tax. 72 As has already been pointed out, the 
tax imposed on Mr. Ficklen was rather in default of a property tax 
than in lieu of one, since he had no property devoted to his occu- 
pation and so escaped nothing else by paying the tax on gross 
receipts. The only distinction in this respect between the Ficklen 
case and the Galveston case is that the railroad did have property 
in Texas used in its occupation and that this property was taxed. 73 
On this ground the two cases may be distinguished, so that it cannot 
be said that the latter overrules the former; nor does the opinion 
in the latter attempt to reinterpret the former. The present 
health of the Ficklen case will be diagnosed later. 74 If it is not yet 
moribund, the scope for gross-receipts taxes is somewhat wider than 
that plotted in Mr. Justice Holmes' reinterpretation of the Maine 
case. We shall inquire later whether, in order to impose a gross- 
receipts tax, there must be some other recognized subject of state 
taxation which is exempted from other burdens than the payment 

70 Note 38, supra. 

71 145 U. S. 1, 23, 12 Sup. Ct. Rep. 810 (1892), referred to, but not quoted, in 210 
U. S. 217, 226, 28 Sup. Ct. Rep. 638 (1908). 

72 145 U. S. 1, 24, 12 Sup. Ct. Rep. 810 (1892). This passage is quoted on page 
379, supra. 

73 Another distinction which is possibly material in other connections is that the 
Shelby County tax was only on those who desired to do a "general business," while 
the Texas tax was on all railroads whose lines lay wholly within the state. The Texas 
tax would fall by its terms on such a corporation which confined itself to interstate 
commerce. As a practical matter, however, this distinction is negligible, since no 
railroad whose lines lay wholly within the state would confine itself to interstate 
commerce. 

74 See pages 409-16, infra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 391 

of a percentage of gross-receipts, or whether it is sufficient that the 
gross-receipts tax is not a drain on any economic interest that is 
making other contributions to the state treasury, i.e., whether a 
gross receipts tax in default of other taxes is as good as one in lieu 
of them. 75 

Another question that presents itself is whether a gross-receipts 
tax must be in lieu of all taxation on tangible property or some 
part thereof, or whether it is saved from sin if the valuation of the 
tangible property does not include its value as part of a "going 
concern," that is, does not include the contribution of the business 
in which the property is employed. The Galveston case does not 
answer this question. In the Maine case the road-bed and rolling 
stock contributed nothing to the state except the excise on gross 
receipts. In the Galveston case, no property of the road went 
unassessed because of the gross-receipts tax. But it was not be- 
cause no property went unassessed that Mr. Justice Holmes distin- 
guished the Texas tax from that of Maine. It was because " another 
tax on the property of the railroad is upon a valuation of that 
property, taken as a going concern." 76 The value of the business 
had already been reached by the subjection of the company's 
franchise to an ad valorem tax as property. This value of the busi- 
ness is what the Supreme Court calls the "intangible property." 
Texas took toll from this intangible property by a tax on the valua- 
tion of the franchise and by the gross-receipts tax as well. Plainly a 

75 See pages 414-16, infra. 

76 210 U. S. 217, 228, 28 Sup. Ct. Rep. 638 (1908). Italics are writer's. In the 
opinion, this passage is not preceded by "because," but by the statement: "On the 
contrary, we rather infer from the judgment of the state court and from the argument 
on behalf of the state that," etc. In the opinion of the state court, Judge Brown, in 
distinguishing some earlier Texas decisions, said: "The fact that the franchise is sub- 
jected in this state to an ad valorem tax as property does not militate against the right 
to tax the persons or the corporations using that property as an occupation any more 
than would the taxing of the physical property of the railroads, as the tracks, right of 
ways, cars, etc., operate to prevent the imposition of occupation taxes for the use of 
them as instruments of transportation. There is nothing in the case cited which in- 
timates a prohibition against levying an occupation tax upon the company which may 
use the franchises taxed as property. As well might it be held that an ad valorem tax 
upon a storehouse, fixtures, and goods would preclude an occupation tax upon the mer- 
chant for pursuing the business of selling goods." State v. Galveston, H. & S. A. Ry. 
Co., 100 Texas, 153, 172,97 S.W. 71 (1906). The Texas court sustained the tax on the 
authority of the Maine case and of the Home Insurance case on which the Maine case 
had been based. The later legislation, and judicial decision in Texas are referred to in 
31 Haev. L. Rev. 762, note 156. 



392 HARVARD LAW REVIEW 

different question would have been presented had the gross-re- 
ceipts tax been the only effort to draw sustenance from the " intangi- 
ble property," even though all tangible property was subjected to 
ad valorem assessments. 

Henderson Bridge Co. v. Kentucky, 77 decided in 1897, appears to 
be a case in which a tax on the "intangible property" of an inter- 
state bridge company was assessed by capitalizing the gross receipts 
and then deducting the value of the tangible property. The majority 
did not notice the fact that gross, rather than net, receipts were 
used. Chief Justice Fuller contented himself with saying that the 
authorities cited in the Ohio Express cases sanctioned the method 
of taxation prescribed by the Kentucky statute, and that the tax 
was not on the interstate business carried on over the bridge, be- 
cause the company did not carry on that business but merely re- 
ceived tolls from its lessee, thus bringing the case within Erie 
Railroad v. Pennsylvania. 78 

The Erie case seemed to go on the ground that tolls received for 
rental were not receipts from interstate commerce although the 
lessee paying the tolls was engaged in interstate commerce, thus 
treating rent from a leased railroad like rent from a leased office 
building. The statute, as paraphrased in the opinion of Mr. Justice 
Shiras, imposed "a tax of eight-tenths of one per centum upon 
the gross receipts of said company for tolls and transportation." 79 
No reference is made in the statement of facts or in the opinion to 
any other features of the state taxing system. Mr. Justice Shiras 
recognizes that receipts from interstate commerce cannot be taxed 
directly, but says that "the tax complained of is not laid on the 
transportation of the subjects of interstate commerce, or on the 
receipts derived therefrom, or on the occupation or business of 
carrying it on." 80 The only hint that the tax was one in lieu of a 
property tax is contained in the succeeding sentence which says: 
"It is a tax upon the corporation on account of its property in a 
railroad, and which tax is measured by a reference to the tolls 
received." 81 

In the Galveston case Mr. Justice Holmes refers to this passage 

77 Note 7, supra. 

78 Note 6, supra. 

79 158 U. S. 431, 435, IS Sup. Ct. Rep. 896 (1895). 
"> Ibid., 438. 

81 Ibid., 439. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 393 

without quoting it, seeming to imply thereby that the tax in the 
Erie case was in lieu of others. No reference is made to the Hender- 
son Bridge case. This case and the Erie case can both be rested on 
the doctrine that receipts from rent are not receipts from inter- 
state commerce. 82 In the Henderson Bridge case the receipts were 
not the direct measure of the tax on intangible property; they were 
merely used by the assessors as a guide in fixing the value of that 
property. Plainly, therefore, neither of these cases can be securely 
relied on to support the contention that a gross-receipts tax is a 
good substitute for an assessment of the intangible property of 
the taxpayer, even though no tangible property has been re- 
lieved from the ordinary ad valorem tax. But such a contention 
is not foreclosed by either of these cases or by the Galveston 
case. The possible distinction between taxes on gross and on 
net receipts will be considered later in connection with the 
cases dealing with the net income taxes of Wisconsin and of the 
federal government. 83 

Those who before 1908, when the Galveston case was decided, 
had struggled in vain to reconcile the decisions on the subject under 
consideration may still remember vividly the relief afforded by Mr. 
Justice Holmes' opinion in that case. It would perhaps be too much 
to say that he straightens out the tangle; but at any rate he tells us 
what methods will hinder and what will help in accomplishing the 
task. He makes it clear that no mechanical logic can minister to 
our needs. He frees us from the tyranny of terms. He exposes 
the assumption that there is any magic in words. He tells us that 
"regulation" is a word of art, which the court uses, not for all that 
regulates, but only for that which regulates too much or in some 
disapproved way. 

"It being once admitted, as of course it must be, that not every law 
that affects commerce, among the States is a regulation of it in a con- 
stitutional sense, nice distinctions are to be expected. Regulation and 
commerce among the States both are practical rather than technical 
conceptions, and, naturally, their limits must be fixed by practical 
lines." ** 

82 This doctrine appears to be now abandoned, at least with respect to rental for the 
use of cars which journey in interstate commerce. See the sentence from Mr. Justice 
Van Devanter quoted on page 402, infra. 

83 See pages 415-16, infra. » 

84 210 U. S. 217, 225, 28 Sup. Ct. Rep. 638 (1908). 



394 HARVARD LAW REVIEW 

The absence of a sharp antithesis between the taxes that have 
been approved and those that have been condemned is frankly- 
recognized : 

"As the property of companies engaged in such commerce may be 
taxed . . . , and may be taxed at its value as it is in its organic rela- 
tions, and not merely as a congeries of unrelated items, taxes on such 
property have been sustained that took account of the augmentation of 
value from the commerce in which it was engaged. . . . Since the com- 
mercial value of property consists in the expectation of income from it, 
and since taxes ultimately, at least in the long run, come out of income, 
obviously taxes called taxes on property and those called taxes on in- 
come or receipts tend to run into each other somewhat as fair value and 
anticipated profits run into each other in the law of damages. The 
difficulty of distinguishing them became greater when it was decided, 
not without much debate and difference of opinion, that interstate car- 
riers' property might be taxed as a going concern." 85 

Then follows the reinterpretation of the Maine case and a quota- 
tion from Postal Telegraph Cable Co. v. Adams: 86 

"By whatever name the exaction may be called, if it amounts to no 
more than the ordinary tax upon property or a just equivalent therefor, 
ascertained by reference thereto, it is not open to attack as inconsistent 
with the Constitution." 87 

The question before the court is said to be " whether this is such a 
tax." 88 Mr. Justice Holmes paves the way for an answer by the 
following recapitulation and analysis: 

"It appears sufficiently, perhaps from what has been said, that we are to 
look for a practical rather than a logical or philosophical distinction. The 
State must be allowed to tax the property and to tax it at its actual 
value as a going concern. On the other hand the State cannot tax the 
interstate business. The two necessities hardly admit of an absolute 
logical reconciliation. Yet the distinction is not without sense. When a 

86 210 U. S. 225-26, 28 Sup. Ct. Rep. 638 (1908). 

86 Note 69, supra. 

87 155 U. S. 688, 697, 15 Sup. Ct. Rep. 268 (1895); quoted in 210 U. S. 217, 227, 28 
Sup. Ct. Rep. 638 (1908). This same passage from the opinion in the Postal Telegraph 
case, together with what immediately precedes it, is quoted by Mr. Justice Day in 
United States Express Co. v. Minnesota, 223 U. S. 335, 347-48, 32 Sup. Ct. Rep. 21 -t 
(191 2). See page 402, infra. 

88 210 U. S. 317, 227, 28 Sup. Ct. Rep. 638 (1908). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 395 

legislature is trying simply to value property, it is less likely to attempt 
to or effect injurious regulation than when it is aiming directly at the 
receipts from interstate commerce. A practical line can be drawn by 
taking the whole scheme of taxation into account. That must be done 
by this court as best it can. Neither the state courts nor the legislatures, 
by giving the tax a particular name or by the use of some form of words, 
can take away our duty to consider its nature and effect. If it bears 
upon commerce among the States so directly as to amount to a regu- 
lation in a relatively immediate way, it will not be saved by name or 
form." 89 

These canons were not difficult to apply to the Texas tax before 
the court. The value of the property as a going concern had al- 
ready been reached by other taxes. To the argument of counsel 
for the state that "'equal' implies, not identity, but duality," 90 
Mr. Justice Holmes replied : 

"The distinction between a tax 'equal to' one per cent of gross receipts 
and a tax of one per cent of the same, seems to us nothing, except where 
the former phrase is the index of an actual attempt to reach the property 
and to let the interstate traffic and the receipts from it alone. We find 
no such attempt or anything to qualify the plain inference from the 
statute taken by itself." 91 

The tax in question was said to be "merely an effort to reach the 
gross receipts, not even disguised by the name of an occupation tax, 
and in no way helped by the words 'equal to.'" 92 It was added 
that "of course, it does not matter that the plaintiffs in error are do- 
mestic corporations or that the tax embraces indiscriminately gross 
receipts from commerce within as well as outside of the State." 93 

89 210 U. S. 227, 28 Sup. Ct. Rep. 638 (1908). 

90 Ibid., 223. 
S1 Ibid., 227. 

92 Ibid., 228. 

93 Ibid., 228. Mr. Justice Harlan, on behalf of the minority, implied that it did 
matter that the corporation was a domestic one, for he says: "The plaintiff in error 
is a Texas corporation, and it cannot be doubted that the State may impose an oc- 
cupation tax on one of its own corporations, provided such tax does not interfere 
with the exercise of some power belonging to the United States" {Ibid., 229-30). 
The proviso of course weakens the statement in logic, if not in judicial psychology; 
but later on page 229 in the passage quoted on page 385, supra, the dissenting opin- 
ion invokes the supposition that the state might impose on railroad corporations "of 
its own creation" an income tax, thus again implying that the domesticity of the 
corporation was a material element r in the case. 

It will be remembered that one of the grounds on which State Tax on Railway 



396 HARVARD LAW REVIEW 

The tax, then, was on the interstate business and not on the 
property at its value as a going concern. When we seek for the 
reason why this tax was not on the property as a going concern, 
we find that it is because there was another tax on the property as 
a going concern. The reason is not completely satisfying. Disre- 
garding words and looking to substance, we do not readily perceive 
why one tax as well as the other cannot be on the property as a 
going concern, nor why one as well as the other is not on the busi- 
ness. There is ample reason why the legitimacy of one may depend 
on the presence or absence of the other, and there is no just ground 
for complaint because the court picked for slaughter the one that 
was before it. Since the state should not have both, but either would 
be allowable if alone, the designation of the good and the bad is 
wisely determined in accordance with the formal line of demarca- 
tion which the court had previously established. Mr. Justice 
Holmes correctly states the traditional theory that the state can 
tax the property at its value as a going concern, but cannot tax 

Gross Receipts, 15 Wall. (U. S.) 284 (1872), proceeded was that the corporation was a 
domestic one, and that this ground of the decision was not overruled in the Philadel- 
phia Steamship case, note 19, supra. In 1875, Railroad Co. v. Maryland, 21 Wall. 
(U. S.) 456 (1874), considered in 31 Harv. L. Rev. 578-79, sustained a charter pro- 
vision requiring an interstate railroad corporation to pay to the chartering state 
semi-annually one-fifth of its total gross passenger receipts. Ashley v. Ryan, 153 U. S. 
436, 14 Sup. Ct. Rep. 865 (1894), 31 Harv. L. Rev. 580-81, and Kansas City, M. & B. 
R. R. Co. v. Stiles, 242 U. S. in, 37 Sup. Ct. Rep. 58 (1916), 31 Harv. L. Rev. 599-600, 
sustained charter provisions requiring a charter fee or an annual excise measured by 
total capital stock. The idea in these cases seemed to be that a state can put any price 
it pleases on the grant of a charter to be a corporation. International & G. N. Ry. Co. v. 
Anderson County, 246 U. S. 424, 38 Sup. Ct. Rep. 370 (1918), however, implies that 
provisions of a police character in corporate charters may by reason of changed con- 
ditions become invalid regulations of interstate commerce. 

These cases, however, do not bear on the question involved in the Galveston case, 
because the tax there in issue was not a franchise tax, nor was it, so far as appears, on 
the statute book when the complainant was incorporated. The franchise was taxed as 
property under another statute. Though Texas had avoided naming the "subject" 
it had selected for taxation, it had by selecting certain kinds of corporations engaged 
in a certain kind of occupation, imposed an occupation tax. The state court had 
called it an occupation tax, and had strongly implied, if not specifically declared, in a 
passage in the opinion immediately preceding that quoted in note 76, supra, that this 
construction was necessary in order to sustain the tax under the state constitution. 
The exaction, therefore, had to stand or fall as an occupation tax, quite independently 
of any peculiar power of a state over its own corperate creatures. The Philadelphia 
Steamship case, note 19, supra, at pages 342-43, shows that where a state seeks to 
justify its exaction as one on the franchise of domestic corporations, it must clearly 
indicate that this is the power and the only power that it is exercising. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 397 

the interstate business. The gross-receipts tax before the court 
did not profess to be a property tax, whereas by another statute 
the franchise was subjected to an ad valorem tax as property. 94 
The state itself had chosen to call one a property tax and the other 
something else. It can hardly complain that the court accepts its 
designations in choosing which one to reject, and decides that it 
is less likely to effect injurious regulation of interstate commerce 
by the tax which it calls a property tax than by the one which is 
more directly on interstate receipts. 

This traditional theory, as Mr. Justice Holmes announces, 
posits two necessities that do not admit of logical reconciliation. 
This is because a tax on the value of the property as a going con- 
cern is a tax on the value of the going concern, and the value of the 
going concern is the value of the business. It would make for 
simplicity and directness to recognize that a tax on the value of 
the business is a tax on the business. The business may be worth 
more or less than the reconstruction cost of the property less 
depreciation. Where the property has no alternative uses, its 
value, whatever its cost, cannot exceed the value of the business 
which it serves. In the case of that part of the property of a rail- 
road which is permanently and inseparably devoted to the business, 
it would be difficult if not impossible to find its value except through 
the value of the business. But this does not apply to migratory 
cars or to the wagons, horses and pouches owned by the express 
companies in Ohio. With respect to such property it is readily 
apparent that a tax on the value of the property as a going concern 
is a tax on the business. This conclusion is fortified rather than 
disguised by resort to the notion that what the state is taxing is 
" intangible property." Intangible property has a familiar connota- 
tion which is quite distinct from the enjoyment or anticipation of 
business profits. 

The logical nebule which the opinions have exhaled by insisting 
that taxes on business were taxes on something else was by no 
means inevitable. It must be dispelled before we can see clearly. 
It is a legal doctrine that a state cannot tax interstate business, but 
it is not on economic fact. We might have been saved from weari- 
some confusion if the court had long ago declared that under some cir- 
cumstances and by some methods a state may tax interstate business, 

84 See note 76, supra. 



398 HARVARD LAW REVIEW 

and that under other circumstances and by other methods it may 
not. Such a declaration would have turned attention more directly 
to the circumstances and to the methods. The rules of law might 
then have been worked out on matter-of-fact lines which avoided 
logical inconsistency by avoiding fictions and the semblance of 
generality when the generality was shadow and not substance. 

We have already considered the reasons why it is as wise and 
necessary to allow the states to tax interstate commerce as to allow 
them to tax property employed in interstate commerce. 95 Exemp- 
tion of such commerce from burdens which local commerce must 
bear would be equivalent to a bounty on interstate commerce. The 
withholding of such a bounty from interstate commerce ought 
not in wisdom to be regarded as "a regulation of it in a constitu- 
tional sense." But the court must be zealous to restrain the states 
from obtaining revenue from extraterritorial sources or from im- 
posing cumulative exactions on interstate business without simi- 
larly burdening all local business. Owing to the ubiquity of property 
taxation and to the fact that the value of real estate and of stocks 
and bonds and similar obligations bears a close relation to the 
income from such property, a state "is less likely to attempt to 
or effect injurious regulation," when it "is trying simply to value 
property" than "when it is aiming directly at the receipts from 
interstate commerce." 96 On the other hand, the states have been 
more sporadic and selective in their impositions on occupations and 
on income. They must therefore be held to strict account when 
they tax income from interstate commerce. They must establish 
that the burden is a general and not a discriminatory one. 

The court is satisfied when the state shows that the income is 
taken as a fair measure of the value of property assessed for taxa- 
tion, or when a tax on income is in substitution for a tax on property. 
It was satisfied in the Ficklen case when gross receipts were taxed 
in the absence of taxation on property because there was no property 
to tax. It has been satisfied more recently with a state-wide income 
tax measured by net rather than gross receipts. 97 In the presence of 

95 32 Harv. L. Rev. 260-62. 

68 From Mr. Justice Holmes' opinion in the Galveston case, quoted on page 394, 
supra. 

97 United States Glue Co. v. Oak Creek, 247 U. S. 321, 38 Sup. Ct. Rep. 499 (1918). 
See pages 415-16, infra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 399 

these safeguards against discrimination, taxes substantially on inter- 
state business have been sustained. Thus the state may aim directly 
at gross or net receipts from interstate commerce, if it restrains 
itself from other shots at the same economic interest, or at net 
receipts if it aims equally at all receipts from all sources within the 
state. The law may be stated in this way with little or no fiction, 
word-juggling or logical inconsistency. Such a mode of statement 
has the further advantage that it throws the spotlight on the "practi- 
cal lines" by which the limits of the practical conception of regu- 
lation are fixed, and which divide all factual regulations of inter- 
state commerce into those that are, and those that are not, 
regulations of that commerce "in a constitutional sense." 

The distinction set forth in the Galveston case and retroactively 
applied to the earlier cases acquits Mr. Justice Brewer of the charge 
of inconsistency. The gross-receipts tax of which he disapproved 
was in addition to another tax on the same business value; those 
which he favored were not. This distinction is the basis of the 
difference between the decisions in Meyer v. Wells, Fargo & Co. 98 
and United States Express Co. v. Minnesota," both of which were 
rendered on February 19, 191 2. Both involved gross-receipts taxes 
on nonresident express companies. The Texas tax held invalid 
in the Meyer case was declared by the statute to be "in addition 
to the faxes levied and collected upon an ad valorem basis upon the 
property and assets of such corporation." 10 ° The Minnesota tax 
held rightfully exacted from the United States Express Company 
was "in lieu of all taxes upon its property." 101 Both decisions were 
unanimous. 

The greater part of the receipts taxed by Minnesota were held 
not to be from interstate commerce. These were from carriage 
between points within the state over a route which passed through 
a portion of another state. The state court had subtracted that 
portion of these receipts which the carriage in the intervening state 
bore to the total carriage. Whether such deduction was necessary 
the Supreme Court was hot called upon to say. It sustained the 
balance on the authority of Lehigh Valley R. R. Co. v. Pennsyl- 

98 223 U. S. 298, 32 Sup. Ct. Rep. 218 (1912). 

99 223 U. S. 33s, 32 Sup. Ct. Rep. 211 (1912). 

100 223 u. S. 298, 29a, 32 Sup. Ct. Rep. 218 (1912). 

101 223 U. S. 335, 339, 32 Sup. Ct. Rep. 211 (1912). 



400 HARVARD LAW REVIEW 

vania, 102 on which the state court had relied. 103 In the Lehigh case, 
Pennsylvania had confined itself to the receipts from that part 
of the transportation which took place within its borders, so that 
the decision does not affirm that it could not have used the receipts 
from the entire journey. 104 Chief Justice Fuller stated that the 

102 i4S U. S. 192, 12 Sup. Ct. Rep. 806 (1892). 

103 State v. United States Express Co., 114 Minn. 346, 349-50, 131 N. W. 489 
(1911). Of the Lehigh case, Judge Bunn observed: "It perhaps does not appear as 
clearly as it might whether the recovery in that case was allowed for the entire earn- 
ings, or for a proportion thereof based upon the mileage within the state; but we 
interpret the decision as allowing a recovery of taxes upon that proportion of the earn- 
ings derived from the carriage wholly within the state. This seems to us the safer 
rule, and avoids any question of taxing interstate commerce, and we adopt and apply 
it to this case. Nine per cent of the taxes recovered on this class of earnings should 
be deducted from the amount of the recovery" (page 350). 

Judge Bunn is warranted in finding the Lehigh case somewhat deficient in clarity. 
From the statement of facts it appears that the auditor-general of the state had "settled 
an account" with the company for its taxes on gross receipts, which account included, 
in addition to receipts from carriage entirely within the state and from carriage be- 
tween two termini within the state passing en route through another state, five other 
classes of receipts all of which were from interstate commerce, with the possible ex- 
ception of class three which was made up of receipts from "transportation by con- 
tinuous carriage from points in a foreign state to other points in the same state passing 
through the state of Pennsylvania." The other receipts taken were from interstate 
commerce originating or ending in Pennsylvania, or passing through Pennsylvania 
between termini in two other states, or commerce not traversing Pennsylvania at all. 

In all instances the total receipts for the entire carriage were taken, and this amount 
was then reduced to a fraction which corresponded to the fraction of the company's 
total mileage which lay within the state. The state court relieved the company from 
any inclusion in the assessment of the last five classes enumerated. So far as appears, 
the state made no endeavor to amend the account so as to levy on all the receipts in 
the first two classes. Plainly there was no necessity that it should restrict itself to 
less than all of the receipts from commerce wholly within the state. Its use of the 
fraction was part of another plan which the state court frustrated. It is evident, 
however, it was only the fraction of the receipts from commerce between points in the 
state passing through the intervening state that came to the Supreme Court, for Chief 
Justice Fuller states that "the tax under consideration here was determined in respect 
of receipts for the proportion of the transportation within the State ..." (145 U. S. 
192, 201). 

104 The natural inference from the opinion of Chief Justice Fuller is that the whole 
trip was an intra-state trip, so far as taxation is concerned, since he answers in the 
negative the question whether "the mere passage over another State renders that 
business foreign, which is domestic." Ewing v. Leavenworth, 226 U. S. 464, 33 Sup. 
Ct. Rep. 157 (1913), allowed a state to impose a flat fee on this kind of commerce. 
In New York ex rel. Cornell Steamboat Co. v. Sohmer, 235 U. S. 549, 35 Sup. Ct. Rep. 
162 (1915), it was held that no deduction from receipts for transportation on the 
Hudson River between New York points was necessary because the route traversed 
water within the jurisdiction of New Jersey or because the tows which carried the com- 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 40 1 

question "is simply whether, in the carriage of freight and passen- 
gers between two points in one State, the mere passage over the 
soil of another State renders that business foreign, which is domes- 
tic," 105 and he answered that, "we do not think such a view can 
reasonably be entertained." 106 

The remaining receipts levied on by Minnesota, to which the 
United States Express Company objected, were from that part of in- 
terstate commerce which it carried on within Minnesota, including 
carriage to or from points within the state and carriage through 
the state between termini in other states. All this business was 
received by the complainant at a point within the state, either from 
the shipper or from connecting carriers in other states, and was 
delivered within the state either to the consignee or to a connect- 
ing carrier. For some reason Minnesota did not claim taxes upon 
such interstate receipts "where the same express company per- 
forms the transportation service both within and without the 
State." 107 That this self-denial was imposed by benevolence and 

merce were made up in New Jersey. Whether there was any distinction in this respect 
between transportation over water and that over land was not. considered. 

In the case of land transportation, the state of termini has been forbidden to regulate 
the rates of carriage which traverses an intervening state. Hanley v. Kansas, etc. 
Ry., 187 U. S. 617, 23 Sup. Ct. Rep. 214 (1903). The state is also forbidden to direct 
that a carrier shall ship between two points in the state by a route which is wholly 
within the state rather than by one which dips into another state. Northern Pacific 
Ry. Co. v. Solum, 247 U. S. 477, 38 Sup. Ct. Rep. 550 (1918). On the other hand, 
California was allowed to regulate rates for carriage between two points in the state 
traversing the high seas en route. Wilmington Transportation Co. v. Railroad Com- 
mission, 236 U. S. 151, 35 Sup. Ct. Rep. 276 (1915). See editorial notes in 27 Harv. 
L. Rev. 686, and 28 Harv. L. Rev. 634. Here of course there was no intervening state 
whose jurisdiction was in any way interfered with. 

The Cornell Steamboat case, supra, if applicable to land transportation, would 
allow a state to extract revenue from receipts from transit which is not within its own 
police protection and which is likely to cause expense to its neighbor within whose 
borders it takes place. In the Lehigh Valley case, Chief Justice Fuller thought it 
important to say that "it should be remembered that the question does not arise as 
to the power of any other State than the State of the termini " (page 202) . This carries 
the possible implication that the transit in the intervening state is interstate commerce, 
so far as its powers of taxation are concerned. Quite aside from the commerce clause, 
a grave question arises whether a state should tax receipts from extra-territorial 
transit. The difference between land and water transportation seems sufficient to 
warrant the restriction of the Cornell Steamboat case to the particular kind of trans- 
portation there before the court. 

106 145 U. S. 192, 202, 12 Sup. Ct. Rep. 806 (1892). 

106 Ibid., 202. 

107 223 U. S. 335, 341, 32 Sup. Ct. Rep. 211 (1912). 



402 HARVARD LAW REVIEW 

not by the Constitution is evident from Cudahy Packing Co. v. 
Minnesota, 1QZ decided last April, in which the Supreme Court sus- 
tained a similar gross-receipts tax imposed by the same state on 
receipts earned within its borders from refrigerator cars which ran 
in and out of the state. 

The packing company which owned the cars received a "com- 
pensation or rental" 109 of one cent a mile from the railroads which 
transported them, and paid the railroads the usual tariff rates for 
the transportation of its own products, allowing the roads to carry 
the products of others on the return trip. Mr. Justice Van Devanter 
concluded his opinion by saying that, "we think the tax is not dis- 
tinguishable from that sustained in United States Express Co. v. 
Minnesota," 110 without referring to the fact that in that case "the 
transportation in connection with such shipments outside of the 
state of Minnesota was performed by connecting companies other 
than the defendant." m Nor did the opinion refer to the possi- 
bility of applying the point made in Erie Railroad v. Pennsylvania m 
and Henderson Bridge Co. v. Kentucky 115 that the receipts were 
from rental of property rather than from interstate carriage. It 
stated, however, that if the tax "is laid on the earnings as such, 
they being derived largely from interstate commerce, it is an un- 
constitutional restraint or burden on such commerce and void," 114 
thus abandoning the doctrine of the earlier cases without noticing 
that it had done so. 

Both of these Minnesota taxes were treated as property taxes 
measured by gross receipts. It appears, however, that from all 
"receipts for business done within the State by such company in 
connection with other companies" the United States Express Com- 
pany was allowed to deduct "the amounts paid for transportation to 
railroads within the State." 115 No mention of this concession was 
made in Mr. Justice Day's opinion. From the Cudahy Packing 
case it appears that the railroads were allowed to deduct their 

108 246 U. S. 450, 38 Sup. Ct. Rep. 373 (1918). 

109 Ibid., 451. 
uo Ibid., 456. 

m 223 U. S. 33s, 341, 32 Sup. Ct. Rep. 2x1 (1912). 
m Note 6, supra. 

113 Note 7, supra. 

114 246 U. S. 450, 453, 38 Sup. Ct. Rep. 373 (1018). 
118 223 U. S. 335, 339, 32 Sup. Ct. Rep. 211 (191 2). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 403 

payments for the use of the cars from their "gross earnings" used as 
the measure of another tax not before the court. This was referred 
to as disclosing "a purpose to avoid taxing the same property 
twice or at more than its value, measured by what it earns." 116 
The Cudahy people contended that the cars were taxed twice because 
the railroad paid on their earnings to them less the one cent a mile 
paid as rental, but Mr. Justice Van Devanter answered: 

"The contention apparently assumes that the receipts from such ship- 
ments arise solely from the use of these cars, whereas they arise in part 
from the use of the tracks, locomotives, fuel, labor and the like pro- 
vided by the railroads. Not improbably only a minor part is fairly 
attributable to the use of cars. In any event, the company has an in- 
terest in the car line which yields it a rental of one cent for each mile 
of travel. This interest is taxable and the State values it for that pur- 
pose by the rental received." m 

It is obvious that a gross-receipts tax on selected kinds of prop- 
erty may be used as a device to tax property employed in interstate 
commerce more heavily than the great bulk of property which is 
assessed by the ad valorem method. Unless some curb is set to the 
rate of assessment on the gross receipts, a state may easily extract 
from interstate commerce more than its proportional contribution 
to the public revenues. The court has appreciated this danger. 
In the United States Express case Mr. Justice Day quotes from 
the opinion in Postal Telegraph Cable Co. v. Adams 118 as follows: 

" Doubtless, no State could add to the taxation of property according 
to the rule of ordinary property taxation, the burden of a license tax on 
the privilege of using, constructing, or operating an instrumentality of 
interstate or international commerce, or for the carrying on of such 
commerce; but the value of property results from the use to which it is 
put, and varies with the profitableness of that use, and by whatever 
name the exaction may be called, if it amounts to no more than the or- 
dinary tax upon property or a just equivalent therefor, ascertained by 
reference thereto, it is not open to attack as inconsistent with the 
Constitution." 119 

116 246 U. S. 450, 456, 38 Sup. Ct. Rep. 373 (1918). 

117 Ibid., 456. 

118 Note 69, supra. 

119 155 U. S. 688, 697-98, is Sup. Ct. Rep. 268 (1895); quoted in 223 U. S. 335, 
347-48, 32 Sup. Ct. Rep. 211 (1912). Italics are writer's. Another portion of Chief 
Justice Fuller's opinion in the Postal Telegraph case (not referred to "by Mr. Justice 



404 HARVARD LAW REVIEW 

Mr Justice Day then adds: 

"We think the tax here in question comes within this principle. There 
is no suggestion in the present record, as was shown in Fargo v. Hart, 
193 U. S. 490, that the amount of the tax is unduly great, having refer- 
ence to the real value of the property of the company within the State 
and the assessment made." m 

The evil that appeared in Fargo v. Hart m was necessarily absent 
in the United States Express case, for it consisted of including in 
the total value of property assessed by the unit rule a large amount 
of property outside the state not used in the express business and 
therefore not properly distributable on a mileage basis among 
the various states in which the express business was carried on. 
The unit rule was not used in taxing the United States Express 
Company, since its transportation in question was confined to the 
limits of the state. The only objection open to the company was 
that the rate of six per cent on the gross receipts made the tax rela- 
tively high as compared with general property taxation. This 
objection does not appear to have been made. 

The point was, however, urged by the Cudahy Packing Company. 
It appeared that the average number of cars in the state per day 
ranged from ten to twelve and that "the cash value of each car, as 
a separate article of tangible property, is from $700 to $900." 122 
The contention of the complainant and its dismissal is stated by 
Mr. Justice Van Devanter as follows: 

"Because the usual tax rate if applied to the cash value of the cars 
taken separately, would result in an appreciably lower tax, it is insisted 
that the tax imposed is in excess of what would be legitimate as an 
ordinary tax on the property. But the contention proceeds on an 

Day in the United States Express case) bears on the same point: "But property in a 
State belonging to a corporation, whether foreign or domestic, engaged in foreign or 
interstate commerce, may be taxed, or a tax may be imposed on the corporation on 
account of its property within a State, and may take the form of a tax for the privi- 
lege of exercising its franchises within the State, if the ascertainment of the amount is 
made dependent in fact on the value of its property situated within t>he State (the exaction, 
therefore, not being susceptible of exceeding the sum which might be leviable directly thereon), 
and if payment be not made a condition precedent to the right to carry on the bus- 
iness, but its enforcement left to the ordinary means devised for the collection of 
taxes." 155 U. S. 688, 696. Italics are writer's. 

120 223 U. S. 335, 348, 32 Sup. Ct. Rep. 211 (1912). 

m Note 57, supra. 

» 246 U. S. 450, 452, 38 Sup. Ct. Rep. 373 (1918). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 405 

erroneous assumption. The State is not confined to taxing the cars 
or to taxing them as separate articles. It may tax the entire property, 
tangible and intangible, constituting the car line as used within its limits 
and may tax the same at its real value as part of a going concern. The 
record makes it reasonably certain that the property, valued with refer- 
ence to its use and what it earns, is worth considerably more than the 
cash value of the cars taken separately — enough more to indicate that 
the tax is not in excess of what would be legitimate as an ordinary tax 
on the property taken at its real or full value." 123 

An interesting variant of the same question is raised in the Ohio 
Tax Cases. 124 Before the decision in the Galveston case, Ohio had 
a statute under which railroads were required to pay one per cent 
of their gross earnings from all commerce within the state. After 
the Galveston decision, the Ohio law was amended so that the 
gross-receipts tax was limited to intra-state receipts. The rate on 
railroads however, was increased from one to four per cent. Coun- 
sel for the company contended that this increase 

"was due to the fact that it was conceived that about three-fourths of 
their business was interstate, and that therefore a tax of 4% on the 
intrastate earnings would be about equal to a tax of 1% on the total; 
in other words, that the tax rate was increased fourfold because such 
utilities were engaged in interstate commerce." 125 

The argument was that a disproportionate rate on the intra-state 
receipts of companies whose business was preponderantly inter- 
state was in effect an effort to tax the interstate receipts. 

The Ohio tax was not in lieu of a property tax, so that, in view 
of the general trend of recent decisions, there was strong reason to 
believe that the court would hold it unconstitutional if, under the 
guise of levying on receipts from local commerce, it in substance 
reached those from interstate commerce. The complaint of .the 
companies was like that made unsuccessfully in Pullman Co. v. 
Adams 126 and Allen v. Pullman's Palace Car Co. 127 in which it was 
urged that a specific tax of $3,000 and a tax of $100 plus twenty-five 
cents per mile, imposed nominally on intra-state commerce, were in 

™ 246 U. S. 455-56, 38 Sup. Ct. Rep. 373 (1918). 
™ 232 U. S. 576, 34 Sup. Ct. Rep. 372 (1914). 
126 Ibid., 592. 

126 189 U. S. 420, 23 Sup. Ct. Rep. 494 (1903). See 31 Haev. L. Rev. 582. 

127 191 U. S. 171, 24 Sup. Ct. Rep. 39 (1903). See 31 Harv. L. Rev. 582-83. 



406 HARVARD LAW REVIEW 

effect on interstate commerce because the local commerce was un- 
remunerative. The contention was rejected on the ground that the 
companies were free to abandon the intra-state commerce and thus 
avoid the tax. This ground of decision was later discountenanced in 
Western Union Telegraph Co. v. Kansas, 128 and Looney v. Crane 
Co. 129 at least in its application to taxes in substance on extraterri- 
torial values. It does not appear that it was open to the companies 
before the court in the Ohio Tax Cases. 130 Presumably they were 
not, like the Pullman companies in Mississippi and Tennessee, 
expressly relieved from the common-law duty to serve all, and 
therefore could not abandon the local commerce unless they with- 
drew from the business entirely. 131 

It would seem that counsel for the railroads in Ohio raised a point 
of undoubted merit, provided it was supported by the facts. The 
rates on other public utilities less likely to be engaged in inter- 
state commerce were less than half of those on railroads and pipe 
lines. Plainly there was evidence of a process of artificial selection 
which, if carried far enough, might effectively impose discriminatory 
burdens on interstate commerce. The court's treatment of the 
issue thus raised seems somewhat evasive. Mr. Justice Pitney 
contents himself with saying: 

"The present act does not on its face manifest a purpose to inter- 
fere with interstate commerce, and we are unable to accept the historical 

m Note 21, supra. 129 245 U. S. 178, 38 Sup. Ct. Rep. 85 (1917). 

130 Note 124, supra. 

131 For a different view on this point see Northern Pacific Railway Co. v. Gifford, 
25 Idaho, 196, 136 Pac. 1131 (1913), 31 Harv. L. Rev. 737. See also 31 Harv. L. 
Rev. 762, note 156. Even though a carrier might be permitted by a state to abandon 
a local business that excessive taxation made unprofitable, such economically enforced 
abandonment ought on the doctrine of the Western Union case and the Looney case 
(notes 21 and 129, supra) to be held an unconstitutional burden on interstate commerce. 
Those were cases in which a state had measured its tax by extraterritorial values, but 
the same unpleasant effect on interstate commerce may be produced by picking for 
exceptionally high taxation on local business those corporations that are engaged also 
in the kind of interstate commerce that can be economically conducted only by being 
carried on in connection with local commerce. For an able discussion of this point see 
Gerard Carl Henderson, "The Position of Foreign Corporations in American Con- 
stitutional Law," 2 Harvard Studies in Jurisprudence, Cambridge, Harvard Uni- 
versity Press, 1918, chapter 7, especially pages 130-31. Mr. Henderson's contribu- 
tion is of exceptional merit and importance. Its consideration of the struggle between 
the "restrictive" and the "liberal" theories of the nature of corporations at home and 
abroad, and of their shifting fortunes, throws a most helpful light on the cases in this 
series of articles which deal with state excises on domestic or foreign corporations. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 407 

facts alluded to as sufficient evidence of a sinister purpose, such as would 
justify this court in striking down the law. We could not do this without 
in effect denouncing the legislature of the State as guilty of a conscious 
attempt to evade the obligations of the Federal Constitution. Assuming 
the law was changed in 19 10 because of a fear that the Cole Law would 
be held unconstitutional, the mere fact that, while excluding interstate 
earnings from the multiplicand, the multiplier was increased, is not 
of itself deemed sufficient evidence of an unlawful effort to burden a 
privilege that is not a proper subject of state taxation." m 

This method of dismissal does not close the door to similar ob- 
jections founded on economics and mathematics rather than on 
history. The record of state legislatures in the field of indirect 
action against interstate commerce is hardly one to blind the court 
to the possibility that now and then some state Solons may be 
"guilty of a conscious attempt to evade the obligations of the 
federal Constitution." Without venturing into the precarious 
enterprise of attempting to analyze motives, we may see signs in 
the cases reviewed in this discussion that state legislatures have not 
infrequently sought to attain in roundabout ways what there was 
good reason to believe might not be accomplished directly. 133 

132 232 U. S. 576, 593, 34 Sup. Ct. Rep. 372 (1914). 

133 Objections based by complainants on the state constitution have a bearing on 
the commerce question. One road contended that the tax was confiscatory because 
the gross earnings from intra-state business were not sufficient to pay the actual op- 
erating expenses due to that business. Another road adduced in support of the same 
objection the allegations that it was not "able to earn, from interstate or intrastate 
business, or both combined, after paying necessary and proper expenses, including 
taxes other than the excise tax, a return on the investment in its railroad, or on the 
value thereof, equal to the current rate of return on legitimate high-grade investments 
at all times readily available in the market" (232 U. S. 576, 588). Reliance was placed 
on declarations of the Ohio court in earlier cases to the effect that certain provisions 
in the state constitution "are implied limitations upon the power of taxation of privi- 
leges and franchises, and limit such taxation Lo the reasonable value of the privilege 
or franchise conferred originally, or to its continued value from year to year," and that 
"these limitations prevent confiscation and oppression under the guise of taxation, 
and the power of taxation cannot extend beyond what is for the common or public 
welfare, and the equal protection and benefit of the people; but the ascertaining and 
fixing of such values rests largely in the general assembly, but finally in the courts" 
(Ibid., 588-89). 

To this the Supreme Court answered that the state court in the cases relied on 
" dealt with a general law and its operation on all corporations of given classes through- 
out the State, and not with its effect upon specific financially weak corporations; that 
it was not intended to hold that the courts as final arbiters might overthrow a law im- 
posing a tax on privileges and franchises merely because in isolated cases such law 



408 HARVARD LAW REVIEW 

Only two more cases on gross-receipts taxes remain to be con- 
sidered. Both were decided during the 191 7 term of court. The 
Wisconsin demand in issue in Northwestern Life Insurance Co. v. 
Wisconsin 134 was in lieu of all others except taxes on real estate, 
and was sustained as a commutation tax. Income from real estate 
was not included in the assessment. The court did not find 

"it necessary to decide whether the so-called foreign investment busi- 
ness of the company does or does not of itself amount to interstate 
commerce," 135 

since it held that, 

"if it amounts to commerce of that character no burden is cast upon it 
by such tax as is here involved, since the gross receipts coming from 
that character of business are used only as a measure of the value of the 
property and franchise lawfully taxable in the State." 136 

The Supreme Court accepted the state court's "views of the 
nature and effect of the law," recognizing that they were not con- 
clusive upon it, but rinding "no reason to reject them." m Touch- 
ing the effect of the tax, the state court had found that it did not 
appear from the allegations in the complaint "that the plaintiff 
now pays substantially greater sums than it would pay under 
either the income taxation system or the former personal property 
taxation system." 138 The rate of levy was three per cent. Noth- 
ing in the decision or the opinion closes the door to future conten- 
tions that the effect of a gross-receipts tax on selected property 
or businesses or corporations is to impose disproportionate burdens 
on interstate commerce and so to amount to a regulation of that 
commerce "in a constitutional sense." There is every reason to be- 

might impose a hardship, but only that those excise laws whose general operation is 
confiscatory and oppressive are unconstitutional" {Ibid., 589). Mr. Justice Pitney 
added that it is not "to be inferred that the franchises of plaintiffs in error are value- 
less merely because it appears that the present earnings of the railroads are not suffi- 
cient to pay more than can be derived from legitimate high-grade investment securi- 
ties that are readily available on the market, or (in the case of one of the roads) are not 
even sufficient to pay operating expenses. Upon this point we are content to refer to, 
without repeating, the language employed by Mr. Justice Miller, speaking for this 
court in State Railroad Tax Cases, 92 U. S. 575, 606." 

134 247 U. S. 132, 38 Sup. Ct. Rep. 373 (1918). 

135 Ibid., 138. 

136 Ibid., 138. 

137 Ibid., 137. 
188 Ibid., 137. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 409 

lieve that the Supreme Court will insist that a gross-receipts tax, im- 
posed as a substitute for property taxes, must be a fair substitute, 
and must not through excessive rates of levy take disproportionate 
toll from a selected class of taxpayers engaged in interstate 
commerce. 

The gross-receipts tax declared invalid in Crew Levick Co. v. 
Pennsylvania 139 was imposed under the following provision of the 
statutes : 

"Each wholesale vender of or wholesale dealer in goods, wares and 
merchandise shall pay an annual mercantile license tax of three dollars, 
and all persons so engaged shall pay one-half mill additional on each 
dollar of the whole volume, gross, of business transacted annually." 140 

The state court had called the tax one "upon the business of vend- 
ing merchandise." 141 The complainant during the year in question 
had received about $47,000 from intra-state sales, so that there was 
no doubt that it was subject to an occupation tax. It confined its 
objections to the levy on receipts of about $430,000 from customers 
in foreign countries, insisting that a tax on such receipts was both 
a regulation of foreign commerce and an impost upon exports. Of 
these objections Mr. Justice Pitney said that 

"although dual in form, the question may be treated as a single one, 
since it is obvious that, for the purposes of this case, an impost upon 
exports and a regulation of foreign commerce may be regarded as inter- 
changeable terms." 142 

The decision may therefore be treated as one on the law of inter- 
state commerce. 

The Crew Levick case insistently demands comparison with 
Ficklen v. Shelby County Taxing District 143 on which the Common- 
wealth of Pennsylvania unsuccessfully relied. Formal distinctions 
between the statutes in the two cases readily suggest themselves. 
Mr. Ficklen would not have been subject to the Shelby County law 
if he had not asked for a license to do a general business, but had 
held himself out to do only interstate business. The Crew Levick 
Company would have been taxed under the Pennsylvania statute 

139 245 U. S. 292, 38 Sup. Ct. Rep. 126 (1917). 

140 Ibid., 293. 

141 Ibid., 295. 

142 Ibid., 295. 

143 Note 23, supra. 



4 iO HARVARD LAW REVIEW 

though it had notoriously restricted its solicitations and ministra- 
tions to customers beyond the seas. By no limitation of its enter- 
prise less than a complete abandonment could it exclude itself from 
the terms of the Pennsylvania law. Nor did it have the possibility 
enjoyed by Mr. Ficklen of having the exaction measured by the 
amount of capital employed in the business rather than by the gross 
receipts therefrom. From every dollar received from interstate or 
foreign commerce Pennsylvania inexorably demanded that it render 
tribute unto Caesar. Formally and technically, therefore, the Su- 
preme Court was quite correct in saying that the authority of the 
Ficklen case "would have to be stretched in order to sustain such 
a tax as is here in question." 144 Hence formally and technically 
the Crew Levick case does not overrule the Ficklen case. 

In substance, however, the situations of Mr. Ficklen and of the 
Crew Levick Company were approximately the same. If the Penn- 
sylvania law had been identical with that of Shelby County, the Crew 
Levick Company would undoubtedly have asked for the same kind of 
license that Mr. Ficklen did. It would hardly have cut itself off 
from $47,000 of local business in order to avoid a tax of $215 on 
its receipts from foreign business. Nor would it be likely to suffer 
less by having the tax measured by the capital used in the business. 
Ten cents on each $100 of its capital would amount to more than 
$215 as soon as that capital exceeded $215,000. It would not ap- 
pear to be material that the capital of the Crew Levick Company 
may be otherwise taxed by Pennsylvania, for there is no indica- 
tion that Mr. Ficklen would have escaped the ordinary property 
tax on his capital if he had been fortunate enough to possess any. 

Looking through form to substance, both Shelby County and 
the Commonwealth of Pennsylvania imposed an occupation tax 
measured by gross receipts from all business whether foreign or 
local. Had the Crew Levick Company, like Mr. Ficklen, done no local 
business whatever during the year in question, it would still have 
been within the terms of the Pennsylvania statute, but clearly 
would not have been engaged in a taxable occupation, and so would 
not have been caught, as he was caught, by reason of the peculiar 
provision of the Shelby County Law whereby taxability depended 
upon professions and not upon events. But here by the course of 

144 245 U. S. 292, 296, 38 Sup. Ct. Rep. 126 (191 7). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 411 

events the Crew Levick Company was engaged in a taxable occu- 
pation. It was taxable and was taxed. The only dispute was over 
the measure of the tax. The Supreme Court disallowed that part 
of the measure which embraced receipts from commerce not con- 
fined to the state. It did not hold the Pennsylvania law void. If 
later the Pennsylvania court interprets the law as not applicable 
to concerns that refrain from local business, 145 the Supreme Court 
will have difficulty in applying the Crew Levick case without 
definitely overruling the Ficklen case. 

In the absence of such a restrictive interpretation by the state 
court, the Supreme Court followed established practice 146 in re- 
fusing to rewrite the state law so as to bring it within the doctrine 
of the Ficklen case. Taking the Pennsylvania law as it reads, it 
plainly taxes interstate as well as local occupations; and, in so far 
as it makes the former a subject of taxation, it easily comes within 
the condemnation visited on those imposts which are "on inter- 
state commerce itself" or on receipts from such commerce "as 
such." 147 Pennsylvania had not encased its demand in the fiction 
coating which is essential to bring it within those levies on inter- 
state commerce which have been regarded as "merely incidental 
or indirect." At times this coating has seemed to need no other 
ingredient than words. The Crew Levick case naturally excites 
our curiosity whether a merely verbal compound can in these days 
turn poison into meat. 

Mr. Justice Pitney's opinion indicates that it cannot. Not a 
little that he says is quite as applicable to the tax sustained in the 
Ficklen case as to that held invalid in the Crew Levick case. Of 
the former he says that "undoubtedly that case is near the border 

145 For an instance of such construction by a state court of a statute imposing license 
taxes varying in amount according to the population of the towns and cities in which 
business was carried on, see Osborne v. Florida, 164 U. S. 650, 17 Sup. Ct. Rep. 214 
(1897). In the cases of taxes on gross receipts the federal courts will make the necessary 
separation, when it is feasible, and hold void only that part on interstate receipts. 
Ratterman v. Western Union Telegraph Co., 127 U. S. 411, 8 Sup. Ct. Rep. 1127 (1888). 
But where a specific fee is imposed, the Supreme Court will not assume that the sub- 
ject taxed is local business only if the language of the statute applies to any or all 
business. See cases cited in note 146. 

148 Leloup v. Port of Mobile, 127 U. S. 640, 8 Sup. Ct. Rep. 1380 (1888); Crutcher v. 
Kentucky, 141 U. S. 47, " Sup. Ct. Rep. 851 (1891); Williams v. Talladega, 226 U. S. 
404, 33 Sup. Ct. Rep. 116 (1912). » 

147 See cases cited in note 19, supra. 



4 I2 HARVARD LAW REVIEW 

line." 148 One distinction which he draws is so frail that a breath 
of thought would disintegrate it. "Besides," he says, 

" the tax imposed in the Ficklen Case was not directly upon the business 
itself or upon the volume thereof, but upon the amount of commissions 
earned by the brokers, which, although probably corresponding with 
the volume of the transactions, was not necessarily proportionate thereto. 
For these and other reasons the case has been deemed exceptional." 149 

This assumed distinction is no more than that the Crew Levick Com- 
pany sold their own products, while Mr. Ficklen was a somewhat 
independent intermediary between seller and purchaser. It is 
the distinction between receipts from commissions on sales and 
receipts from sales. One is quite as likely not to be necessarily 
proportional to the volume of the transactions, if this means the 
quantity of goods sold, as is the other. Even if by "volume of the 
transactions " Mr. Justice Pitney means the volume as measured by 
gross receipts, it cannot be important that the broker's commissions 
were not exactly proportional to the prices paid the seller. If the 
broker's part in the transaction is regarded as interstate commerce, 
his receipts are from interstate commerce, and whether he were 
paid by the day or the deal or by a percentage can hardly matter. 
In so far as there is any validity to the distinction suggested, it re- 
lates to the nature of the business involved in the different cases 
and not to the character of the statutes. 

It is not unlikely that it is a distinction between the businesses 
that the learned Justice has in mind. This can hardly be gathered 
from the opinion in the Crew Levick case, but it finds support in 
an earlier opinion of the same Justice in United States Fidelity & 
Guaranty Co. v. Kentucky 15 ° which sustained a specific tax upon a 
mercantile agency engaged in reporting the financial responsibility 
of merchants who bought goods from without as well as from within 
the state. In that opinion Mr. Justice Pitney says: 

" The present case has no close parallel in former decisions, but in some 
of its aspects it bears a resemblance to the case of a tax imposed upon a 
resident citizen engaged in a general business that happens to include 
a considerable share of interstate business. Ficklen v. Taxing District, 
145 U. S. 1. Or the business of the live stock exchange that was under 

148 245 U. S. 292, 296, 38 Sup. Ct. Rep. 126 (1917). 

149 Ibid., 297. 

150 231 U. S. 394, 34 Sup. Ct. Rep. 122 (1913). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 413 

consideration in Hopkins v. United States, 171 U. S. 578, 592. Or the 
business of a cotton broker dealing in futures or options. Ware v. 
Mobile County, 209 U. S. 405." 151 

The Hopkins case and the Ware case held that the acts in question 
were not acts of interstate commerce. The collocation suggests 
that the broker who is a mere intermediary is less intimately con- 
nected with commerce than a vendor or his regular drummers. It 
is not likely that the court would go so far as to hold that such a 
sales broker, like the broker who furnishes exchange, 152 is not him- 
self engaged in the commerce which he facilitates. But the passage 
above quoted has the aroma of the idea that Mr. Ficklen was a 
degree or two removed from direct participation in interstate com- 
merce, and that therefore the tax which was sustained against him 
must be subjected to more rigid tests if ever it is sought to be im- 
posed on those whose receipts are from interstate commerce instead 
of being receipts from receipts from interstate commerce. To the 
extent that the Ficklen case is now sought to be explained or 
apologized for on any such notion, it is excluded from the class of 
cases with which we are concerned and, from the standpoint from 
which we are considering it, is abandoned. 

We hardly need, however, to enter upon such refinements to 
discern that, even if the Ficklen case still lives, its working days are 
over. Of the tax from which the Crew Levick Company was 
relieved, Mr. Justice Pitney says : 

" It operates to lay a direct burden upon every transaction in commerce 
by withholding, for the use of the State, a part of every dollar received 
in such transactions. That it applies to internal as well as to foreign 
commerce cannot save it; . . . That portion of the tax which is 
measured by the receipts from foreign commerce necessarily varies in 
proportion to the volume of that commerce, and hence is a direct burden 
upon it." 153 

This would be quite as applicable to a tax specifically imposed on 
a local occupation but measured by receipts from all sources. To 
sustain a tax on interstate receipts, something more is now needed 
than the declaration of the state that it is merely using the receipts 
as the measure of a tax on something else that is taxable. The 

151 231 U. S. 399, 34 Sup. Ct. Rep. 122 (1913). 

152 Nathan v. Louisiana, 8 How. (U. S.) 73 (1850). 

163 245 U. S. 292, 297-98, 38 Sup. Ct. Rep. 122 (1917). 



414 HARVARD LAW REVIEW 

court now demands that behind that declaration there must be 
something more substantial than words. The verbal distinction 
on which Maine v. Grand Trunk Railway Co. lhi originally rested 
has been replaced by substance. The Ficklen case, which leaned 
strongly on the Maine case for support, must be similarly reinter- 
preted before its foundations are solid, unless the court is willing to 
preserve an anomaly out of respect for stare decisis. 

The only possible reinterpretation of the Ficklen case which can 
make it applicable to all kinds of interstate commerce is one which 
treats it as sanctioning the use of gross receipts to measure the 
"intangible property" of the taxpayer and thus to estimate values 
not reached by any other tax. This possibility finds some recog- 
nition in Mr. Justice Pitney's comment on the Pennsylvania tax 
to the effect that "it bears no semblance of a property tax, or a 
franchise tax in the proper sense; nor is it an occupation tax except 
as it is imposed upon the very carrying on of the business of ex- 
porting merchandise." 155 The Shelby County tax was not one that 
could be regarded as "on" a franchise or "on" property, unless 
a gainful occupation is to be deemed "intangible property." This 
notion of "intangible property" has not been entertained by the 
court except where the intangible has inhered in or been conceptu- 
ally fused with something that was tangible. If pushed further and 
applied where nothing tangible is present, the so-called "intangible 
property" becomes so patently nothing but the value of an occupa- 
tion or business that the court must inevitably recognize it as such. 

Such recognition still leaves a loophole for the Ficklen case. It 
might conceivably squeeze through the opening left by the state- 
ment in the Crew Levick case that the tax there in issue is not "an 
occupation tax except as it is imposed upon the very carrying on of 
the business of exporting merchandise." 156 This leaves room for 
the notion that an occupation tax imposed on carrying on local 
business might be measured by receipts from all business, subject to 
the restriction that the expedient taxes but once and without dis- 
crimination the values contributed by interstate commerce. There 
is no reason, as we have seen, 157 why such values should go com- 

164 Note 5, supra. 

155 245 U. S. 292, 297, 38 Sup. Ct. Rep. 122 (1917). 

168 Cited in note 155, supra. 

167 32 Harv. L. Rev. 260-62, and Ibid., 398. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 415 

pletely untaxed. Where they arise from business unconnected 
with any use of property, they do go untaxed unless some form of 
income tax is allowed. The question must be whether Shelby 
County's form of income tax should be approved, or whether the 
states should be driven to adopt some other method less likely to 
invade the realm which the states must not enter. 

The latest utterance of the Supreme Court indicates that the 
latter alternative is to be chosen. In sustaining the general income 
tax of Wisconsin, measured by net income, the opinion in United 
States Glue Co. v. Oak Creek 158 laid stress on the difference between 
gross receipts and net income. After contrasting the Crew Levick 
case with Peck & Co.v. Lowe, 159 which held that the federal income 
tax was not a tax on exports when measured by net income from 
an exporting business, Mr. Justice Pitney observed: 

"The difference in effect between a tax measured by gross receipts 
and one measured by net income, recognized by our decisions, is manifest 
and substantial, and it affords a convenient and workable basis of 
distinction between a direct and immediate burden upon the business 
affected and a charge that is only indirect and incidental. A tax upon 
gross receipts affects each transaction in proportion to its magnitude 
and irrespective of whether it is profitable or otherwise. Conceivably it 
may be sufficient to make the difference between profit and loss, or so to 
diminish the profit as to impede or discourage the conduct of the com- 
merce. A tax upon the net profits has not the same deterrent effect, 
since it does not arise at all unless a gain is shown over and above ex- 
penses and losses, and the tax cannot be heavy unless the profits are 
large." 16 ° 

Here is wisdom that cannot be gainsaid. It applies so pal- 
pably to any occupation tax measured in whole or part by gross 
receipts from interstate commerce that the Ficklen case can hardly 
hope to survive the menace to its last remaining strength. With 
permission to tax net income from all commerce by a general state- 
wide income tax, the states can no longer complain that the death 
of the Ficklen case would compel them to confer a bounty on 
interstate commerce by exempting it from burdens which rest on 
local commerce. The gross-receipts taxes allowed in substitution 

168 247 U. S. 321, 38 Sup. Ct. Rep. 499 (1918). 

169 247 U. S. 165, 38 Sup. Ct. Rep. 432 (1918). 

180 247 U. S. 321, 329-30, 38 Sup. Ct. Rep. 432 (1918). 



416 HARVARD LAW REVIEW 

for ad valorem taxes on railroad cars and other property may be 
distinguished on the ground that they represent the degree of use 
of such property more closely than do other taxes, and that the 
degree of use bears a fairly close relation to the responsibilities and 
possible expense which such property causes or is likely to cause 
the taxing authority. 

This subject will be adverted to again in the succeeding section 
dealing with taxes on net incomes "as such." 

(To be continued.) 

Thomas Reed Powell. 

Columbia University. 



634 HARVARD LAW REVIEW 



INDIRECT ENCROACHMENT ON FEDERAL 

AUTHORITY BY THE TAXING POWERS 

OF THE STATES. 1 VII 

II. Regulations of Interstate Commerce (concluded) 

2. Taxes not Discriminating A gainst Interstate Commerce (concluded) 

C. Taxes on Acts, Occupations or Income (concluded) 

II. Taxes on Net Income li As Such" 

IT has already been disclosed that at the October, 191 7, Term 
the Supreme Court in United States Glue Co. v. Oak Creek 2 
sanctioned the inclusion of income from interstate commerce in a 
general state income tax measured by net income from all sources. 
The difference "between a tax measured by gross receipts and one 
measured by net income" was said to afford "a convenient and 
workable basis of distinction between a direct and immediate bur- 
den upon the business affected and a charge that is only indirect 
and incidental." 3 

The United States Glue Company was a domestic corporation; 
and in propounding and answering the question to be decided, Mr. 
Justice Pitney included that fact. After summarizing the provi- 
sions of the statute and their application to the plaintiff, he said : 

"Stated concisely, the question is whether a State, in levying a gen- 
eral income tax upon the gains and profits of a domestic corporation, 
may include in the computation the net income derived from trans- 
actions in interstate commerce without contravening the commerce 
clause of the Constitution of the United States." 4 

And the answer is stated as follows : 

"And so we hold that the Wisconsin income tax law, as applied to 
the plaintiff in the case before us, cannot be deemed to be so direct a 

1 For preceding instalments of this discussion see 31 Harv. L. Rev. 321-72 (Jan- 
uary, 1918); Ibid., 572-618 (February, 1918); Ibid., 721-78 (March, 1918); Ibid., 
93 2_ 53 (May, 1918); 32 Harv. L. Rev. 234-65 (January, 1919); and Ibid., 374-416 
(February, 1919). 

2 247 U. S. 321, 38 Sup. Ct. Rep. 499 (1918). 

3 247 U. S. 321, 328, 38 Sup. Ct. Rep. 499 (1918). 

4 Ibid., 326. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 635 

burden upon plaintiff's interstate business as to amount to an uncon- 
stitutional interference with or regulation of commerce among the 
States. It was measured not by the gross receipts, but by the net pro- 
ceeds from this part of plaintiff's business, along with a like imposition 
upon its income derived from other sources, and in the same way that 
other corporations doing business within the State are taxed upon that 
proportion of their income derived from business transacted and prop- 
erty located within the State, whatever the nature of their business." 5 

These portions of the opinion, taken alone, would confine the 
decision to the point that a domestic corporation, engaged in both 
local and interstate commerce, cannot exclude interstate income 
from a tax on net income from all kinds of business which is im- 
posed equally on other corporations doing business in the state. 
This was as far as the court had to go to dispose of the contro- 
versy before it. It was not called upon to say whether the result 
would have been the same in the case of an individual, a partner- 
ship or a foreign corporation or of a business that was exclusively 
interstate. It might, however, have narrowed its decision still 
further, as we shall see later. 6 

While the decision involved a domestic corporation and the 
court confined the case to such a corporation, there is no intima- 
tion in the opinion that an individual or partnership or foreign cor- 
poration would have occupied a more favorable position. Indeed, 
there are hints to the contrary. It is thought important to men- 
tion that the plaintiff was taxed "in the same way that other cor- 
porations doing business within the State are taxed, . . . whatever 
the nature of their business." 7 The incidence of a similar burden 
on other corporations is one of the reasons why this corporation 
cannot complain. The reasonable inference is that the court, in 
seeming in part of the opinion to confine the decision to the kind 

5 247 U. S. 321, 328, 38 Sup. Ct. Rep. 329 (1918). 

6 Infra, page 643-45. 

7 247 TJ. S. 321, 329, 38 Sup. Ct. Rep. 499 (1918). This statement as to other 
corporations is not literally true, for, as we have seen from Northwestern Life In- 
surance Co. v. Wisconsin, 247 U. S. 132, 38 Sup. Ct. Rep. 444 (1918), 32 Harv. L. 
Rev. 408 jF., a gross receipts tax was levied on insurance companies in lieu of all 
other taxes except those on real estate. Public utilities are also excluded from the 
provisions of the income tax law and subjected to ad valorem assessment (note 34, 
infra) . These exceptions, however, do not appear important, since the other methods 
of assessment are regarded as imposing burdens substantially equivalent to those 
which would result from subjection to the income tax. 



636 HARVARD LAW REVIEW 

of corporation that was before it, does not mean to suggest any- 
such distinction between foreign and domestic corporations as ap- 
pears to be made in dealing with excises measured by total capital 
stock. 8 And that the opinion is not confined to corporations is 
apparent from another paragraph in which reference is made to 
"persons." After distinguishing a tax on gross receipts from one 
on net income, Mr. Justice Pitney says of the latter : 

"Such a tax, when imposed upon net incomes from whatever source 
arising, is but a method of distributing the cost of government, like a 
tax upon property, or upon franchises treated as property; and if there 
be no discrimination against interstate commerce, either in the admeas- 
urement of the tax or in the means adopted for enforcing it, it con- 
stitutes one of the ordinary and general burdens of government, from 
which persons and corporations otherwise subject to the jurisdiction of 
the States are not exempted by the Federal Constitution because they 
happen to be engaged in commerce among the States." 9 

The qualifying phrase "otherwise subject to the jurisdiction of 
the state" opens the door to the inquiry whether a foreign cor- 
poration engaged exclusively in interstate commerce could be taxed 
on its net income earned within the state. Such corporations are 
"subject to the jurisdiction of the state" from the standpoint of 
service of judicial process, 10 and taxation of property. 11 But they 

8 Compare Looney v. Crane Co., 245 U. S. 178, 38 Sup. Ct. Rep. 85 (1917), 31 
Harv. L. Rev. 600-18, with Kansas City, M. & B. R. R. Co. v. Stiles, 242 U. S. in, 
37 Sup. Ct. Rep. 58 (1916), 31 Harv. L. Rev. 599-600. See also ^^ Political Science 
Quarterly, 557, note 1. 

9 247 U. S. 321, 329, 38 Sup. Ct. Rep. 499 (1918). 

10 International Harvester Co. v. Kentucky, 234 U. S. 579, 34 Sup. Ct. Rep. 944 
(1914). 

11 This does not appear to have been established by explicit decision, but the many 
cases holding that foreign corporations engaged partly in interstate commerce are 
not entitled to exemption from property taxation convey no hint that the result 
would be different if the business in which the property was employed was exclusively 
interstate. In St. Louis D.Wiggins Ferry Co., n Wall. (78 U. S.) 423 (i87i),the only 
reason given for holding that the property of a foreign corporation engaged exclu- 
sively in interstate commerce was not taxable in St. Louis was that the property had 
no taxable situs there. In Henderson Bridge Co. v. Kentucky, 166 U. S. 150, 17 Sup. 
Ct. Rep. 532 (1897), in which Kentucky was allowed to tax the Kentucky part of an 
interstate bridge owned by a Kentucky corporation, it appeared from the statement 
of facts that Illinois had assessed that part of the bridge which lay within its borders. 
In Gloucester Ferry Co. v. Pennsylvania, 114 U. S. 196, 206, 5 Sup. Ct. Rep. 826 
(1885), Mr. Justice Field declared: "It is true that the property of corporations en- 
gaged in foreign or interstate commerce, as well as the property of corporations 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 637 

are not subject to the jurisdiction so as to be liable to a privilege 
tax on the conduct of their business, 12 or to certain police require- 
ments set forth as a condition on bringing suit in the state courts. 13 
Are they so subject to the jurisdiction as to be liable to a tax on 
their net income? Mr. Justice Pitney plainly intimates that they 
are. A tax on net income, he says, is "like a tax upon property, or 
upon franchises treated as property." It is "but a method of dis- 
tributing the cost of government"; it "constitutes one of the or- 
dinary and general burdens of government." If the property of 
those engaged exclusively in interstate commerce is not exempt 
from state taxation, there is no reason to accord them immunity 
from a tax on their net income, which is "but a method of dis- 
tributing the cost of government, like a tax upon property." The 
important thing in the mind of the court seems to be the gener- 
ality of the burden, with the consequent impossibility of discrim- 
ination against interstate commerce. 

The result of this venture at mind-reading coincides with the 
analysis previously given of state taxes on property assessed by 
capitalizing the income earned from its use. To repeat Mr. Car- 
ter's concession in his brief for the companies in the Ohio Express 
cases : 

"Inasmuch as the existence of the States is necessary to the existence 
of interstate commerce, that ordinary system of taxation which is 

engaged in other business, is subject to State taxation, provided always it be within 
the jurisdiction of the State." As the case before the court involved a foreign cor- 
poration engaged exclusively in interstate commerce, it is fair to presume that the 
dictum above quoted was uttered with such a corporation in mind. In Old Dominion 
Steamship Co. v. Virginia, 198 U. S. 299, 25 Sup. Ct. Rep. 686 (1905), the inference 
from the statement of facts is that the tug " Germania," which was one of the vessels 
of a foreign corporation held taxable in Virginia, was engaged exclusively in inter- 
state commerce, though this fact is not mentioned in the opinion. Property owned 
by a foreign corporation and employed exclusively in work for the United States 
government is taxable. Gromer v. Standard Dredging Co., 224 U. S. 362, 32 Sup. 
Ct. Rep. 499 (1912). The conclusion is irresistible that the many declarations that 
property is not exempt from state taxation because it is employed in interstate com- 
merce are intended to apply to property of foreign corporations engaged exclusively 
in that commerce. 

n Cheney Brothers Co. v. Massachusetts, 246 U. S. 147, 38 Sup. Ct. Rep. 295 
(1918); York Manufacturing Co. v. Colley, 247 U. S. 21, 38 Sup. Ct. Rep. 430 (1918). 

13 International Text Book Co. v. Pigg, 217 U. S. 91, 30 Sup. Ct. Rep. 481 (1910); 
International Text Book Co. v. Lynch^2i8 U. S. 664, 31 Sup. Ct. Rep. 225 (1910); 
Buck Stove Co. v. Vickers, 226 U. S. 205, 33 Sup. Ct. Rep. 41 (191 2); Sioux Remedy 
Co. v. Cope, 235 U. S. 197, 35 Sup. Ct. Rep. 57 (1914)- 



638 HARVARD LAW REVIEW 

necessary to the existence of the States, namely, taxation upon all 
property within them, must be permitted, and the property employed 
in interstate commerce is not to be exempted. . . . Were it not sub- 
ject to taxation in this form the effect would be to confer upon it an 
affirmative advantage equivalent to a pecuniary bounty equal to the 
amount of the tax from which it is exempted." 14 

With the advent of general state-wide income taxes, the "ordi- 
nary system of taxation which is necessary to the existence of the 
states" is no longer confined to property taxation. The income 
tax has come to constitute one of the "ordinary and general" bur- 
dens of government. Reason and psychology combine to warrant 
the expectation that the Supreme Court will not exclude foreign 
corporations engaged exclusively in interstate commerce from the 
"corporations otherwise subject to the jurisdiction of the states" 
with respect to taxes on net incomes. 15 

It seems safe, therefore, to state the principle of the Oak Creek 
case by saying that a general state-wide tax on net income is not 
"an unconstitutional interference with or regulation of commerce 
among the states" by reason of the inclusion of net income from 

14 This passage is quoted more at length in 32 Harv. L. Rev. 261. 

15 This position is taken by the supreme court of Wisconsin in Superior v. Allouez 
Bay Dock Co., 166 Wis. 76, 80, 164 N. W. 362 (1917), in which Chief Justice Winslow 
says: 

"It must be admitted that the defendant's income arose entirely from interstate 
commerce business. ... Is the levying of an income tax measured by the income 
so derived a burden upon interstate commerce? 

"The question is not free from difficulty, but we think it must be answered in the 
negative. Income taxation is not taxation of property, but is more nearly akin to 
taxes levied upon privileges or occupations. Its amount may be measured by the 
receipts of the business, but it is not in any true sense a tax upon the business itself. 
The subject is covered, as it seems to us, by the decisions of this court in Untied 
States Glue Co. v. Oak Creek, 161 Wis. 211, 153 N. W. 241, and Northwestern Mut. 
L. Ins. Co. v. State, 163 Wis. 484, 155 N. W. 609, 158 N. W. 328, and the cases therein 
cited." 

The cases relied on do not involve concerns whose business was exclusively inter- 
state, so the declaration in the Superior case is no more than the assertion that this 
does not seem material to the court. Moreover, the decision in the Superior case 
that those engaged exclusively in interstate commerce may be constitutionally sub- 
jected to a tax on their net income was a declaration on a moot point, because the 
case held that the defendant was exempted from income taxation, for the reason that 
the property from which the income was derived was railroad property, and the 
complainant was therefore entitled to the benefit of the provision in the Income Tax 
Law which exempts "incomes derived from property and privileges by persons now 
required by law to pay taxes or license fees directly into the treasury of the state in 
lieu of taxes" (166 Wis. 76, 81). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 639 

interstate commerce. The court emphasizes the point that, in the 
absence of discrimination, the effect of such a tax on interstate 
commerce is "indirect" and therefore constitutionally innocuous. 
It regards this effect as identical with the effect on exports of the 
federal net income tax on income from an exporting business. 
Two weeks earlier in Peck &° Co. v. Lowe 16 the court had held that 
it was not a tax on exports to tax the net income of an exporting 
business. In the opinion Mr. Justice Van Devanter had said: 

"The tax in question is unlike any of those heretofore condemned. 
It is not laid on articles in course of exportation, or on anything which 
inherently or by the usages of commerce is embraced in exportation or 
any of its processes. On the contrary, it is an income tax laid generally 
on net incomes. ... It is both nominally and actually a general tax. 
. . . There is no discrimination. At most, exportation is affected only 
indirectly and remotely. The tax is levied after exportation is com- 
pleted, after all expenses are paid and losses adjusted, and after the 
recipient of the income is free to use it as he chooses. Thus what is 
taxed — the net income — is as far removed from the exportation as 
are articles intended for export before the exportation begins." 17 

This passage was paraphrased by Mr. Justice Pitney in the Oak 
Creek case, prefatory to pointing out the distinction between the 
measures of gross and of net income and to minimizing the deter- 
rent effect on interstate commerce of the latter, since a tax on net 
profits "does not arise at all unless a gain is shown over and above 
expenses and losses, and the tax cannot be heavy unless the profits 
are large." 18 

We may take it for granted, then, that the legal character of the 
recipient and the nature of the business in which the recipient is 
engaged are immaterial elements in considering the constitution- 
ality of a state-wide, all-inclusive general tax on net income from 
business done within the state. The recipient may be an indi- 
vidual, a partnership, a domestic or a foreign corporation. The 
business may be exclusively interstate. But the tax must be gen- 
eral, and the measure must probably be net, and not gross, income, 
with the possible qualification that some latitude will be allowed 
the states in prescribing what are permissible deductions by way 

16 247 U. S. 165, 38 Sup. Ct. Rep. 432 (1918). 

17 247 U. S. 165, 174-75, 38 Sup. Ct. Rep. 432 (1918). 

18 247 U. S. 321, 329, 38 Sup. Ct. Rep. 499 (1918). 



640 HARVARD LAW REVIEW 

of interest on indebtedness, expenses, etc., in assessing the taxable 
net income. The statement that the legal character of the recip- 
ient and the source of the income are not significant is not meant 
to preclude further inquiry into the taxability of income from 
extra-state business or from interest or other compensation paid 
by the national government. In determining the constitutionality 
of state taxation of such income, the legal status of the recipient is 
likely to be of controlling importance. 19 

It is doubtless a wholly moot question whether a general state 
tax on gross income would pass muster with the Supreme Court. 
No such tax is likely to be levied. It would bear most unequally 
on different individuals and different enterprises. This considera- 
tion will probably always receive more weight from legislators than 
that which will be given to the opposing element that in some in- 
stances volume of transactions bears a closer relation to the cost 
of governmental supervision than does the balance at the end of 
the fiscal year. Such exceptional instances may be taken care of 
by gross-income taxes in lieu of other taxes. If, however, a state 
should seek to impose a general tax on gross income, it will have 
to reckon with Mr. Justice Pitney's opinion in the Oak Creek case, 
which plainly discountenances the inclusion of receipts from inter- 
state commerce in such a tax. No actual decision, however, pre- 
cludes such inclusion. All of the gross income taxes that have 
been declared unconstitutional have been levies on selected enter- 
prises. So far as words go, a general tax on gross income can be 
called "but a method of distributing the cost of government," as 
readily as can a general tax on net income. And there is an in- 
dication in Mr. Justice Bradley's opinion in Philadelphia 6* South- 
ern Mail S. S. Co. v. Pennsylvania 20 that in 1887 the Supreme Court 
was inclined to think that a general state income tax could levy 
on receipts from interstate commerce, even though the measure of 
the tax was gross, rather than net, income. 

This opinion is referred to by Mr. Justice Pitney in the Oak 
Creek case, in which he quotes Mr. Justice Bradley as saying: 

"The corporate franchises, the property, the business, the income of 
corporations created by a state may undoubtedly be taxed by the 
state; but in imposing such taxes care should be taken not to interfere 

19 See infra , pages 649 ff. 

20 122 U. S. 326, 7 Sup. Ct. Rep. 1118 (1887). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 641 

with or hamper, directly or by indirection, interstate or foreign com- 
merce, or any other matter exclusively within the jurisdiction of the 
Federal government." 21 

Previously Mr. Justice Pitney says that the subject of considera- 
tion in the Philadelphia case was "the distinction between direct 
and indirect burdens, with particular reference to a comparison 
between a tax upon the gross returns of carriers in interstate com- 
merce and a general income tax imposed upon all inhabitants 
incidentally affecting carriers engaged in such commerce. . . ." 22 
From this Mr. Justice Pitney proceeds to point out "the correct 
line of distinction," as illustrated in Crew Levick Co. v. Pennsyl- 
vania 23 and Peck & Co. v. Lowe. 2 * 

Between these two cases there was a double distinction. One 
involved a tax on gross receipts imposed on selected enterprises; 
the other, a tax on net income imposed generally on all enter- 
prises and individuals. When Mr. Justice Bradley made -"partic- 
ular reference to a comparison between a tax upon the gross re- 
turns of carriers engaged in interstate commerce and a general 
income tax imposed on all inhabitants," 25 he appears to have had 
in mind only the distinction between generality and partiality. 
There is no indication that he thought it material whether a gen- 
eral income tax was on gross, or on net, income. The pertinent 
paragraph of his opinion is the one immediately preceding that 
from which Mr. Justice Pitney quotes. After saying that "there 
is another point, however, which may properly deserve some con- 
sideration," Mr. Justice Bradley continues: 

"Can the tax in this case be regarded as an income tax? And, if it 
can, does that make any difference as to its constitutionality? We do 
not think that it can properly be regarded as an income tax. It is not 
a general tax on the incomes of all the inhabitants of the state, but a 
special tax on transportation companies. Conceding, however, that an 
income tax may be imposed on certain classes in the community, dis- 
tinguished by the character of their occupations, this is not an income 
tax on the class to which it refers, but a tax on their receipts for trans- 

21 122 U. S. 326, 345, 7 Sup. Ct. Rep. 1118 (1887); quoted in 247 U. S. 321, 327, 
38 Sup. Ct. Rep. 499 (1918). 

22 247 U. S. 321, 327, 38 Sup. Ct. Rep. 499 (1918). 

23 245 U. S. 292, 38 Sup. Ct. Rep. 126 (1917), 32 Harv. L. Rev. 409 ff. 

24 Note 16, supra. 

25 Note 23, supra. 



642 HARVARD LAW REVIEW 

portation only. Many of the companies included in it may, and un- 
doubtedly do, have incomes from other sources, such as rents of houses, 
wharves, stores, and water power, and interest on moneyed investments. 
... It is unnecessary, therefore, to discuss the question which would 
arise if the tax were properly a tax on income. It is clearly not such, 
but a tax on transportation only." 26 

Here obviously Mr. Justice Bradley regards generality as the 
only essential of a tax "properly a tax on income." He lays no 
foundation for the distinction between gross and net income relied 
on by Mr. Justice Pitney in sustaining the Wisconsin income tax. 
Nor was it necessary to draw such a distinction in the Oak Creek 
case, since the generality of the tax there involved would have 
differentiated it from all taxes previously declared invalid. Had 
the court been inclined to narrow its decision as much as possible, 
the opinion might easily have declared that, since the Wisconsin 
tax was both general and measured by net income, there was no 
bar against its application to income from interstate commerce, 
thereby explicitly leaving open for future determination the ques- 
tion whether either of these qualifications in the absence of the 
other would entitle the law to the same approval. But, in so far 
as the opinion rather than the decision is to be looked at as ex- 
pressing the law for which the case stands, it seems necessary to 
conclude that a general income tax on gross receipts cannot take 
toll from interstate commerce. 

Such gross receipts from interstate as well as local commerce 
may, as we have seen, 27 be the measure of a tax in lieu of a prop- 
erty tax, provided the burden thereby imposed is not substantially 
heavier than what would be laid by the ordinary property tax. If 
this is true of gross-receipts taxes on selected corporations or enter- 
prises, it must also be true of a general tax on gross receipts in lieu 
of a property tax. But such a tax is not likely to be adopted east 
or west of Russia. One may with safety follow Henry George far 
enough to disapprove of relieving real estate from ad valorem taxes 
in order to take only a percentage of the realized gross returns. 
And though we may anticipate that, in many states, income taxes 
will soon be substituted for other demands on chattels as well as 
on intangibles, it is inconceivable that such income taxes will be 

26 122 U. S. 326, 344-45, 7 Sup. Ct. Rep. 11 18 (1887). 

27 32 Harv. L. Rev. 377-416. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 643 

guilty of the inequalities of burden that would ensue from allowing 
to no one any deduction from gross receipts. 

This brings us to the element in the Wisconsin income tax that 
the Supreme Court did not mention. Nothing was said in the 
opinion in the Oak Creek case about the extent to which the tax 
was in lieu of other demands. There is no hint that a state has to 
exempt property of any kind in order to include receipts from in- 
terstate commerce in a general tax on net incomes. Yet the Su- 
preme Court was undoubtedly aware of the fact that the Wisconsin 
tax was one substantially in lieu of all other taxes on chattels and 
intangibles. In Northwestern Mutual Life Insurance Co. v. Wis- 
consin 28 the opinion of Mr. Justice Day quoted a statement from 
the Wisconsin supreme court to the effect that the Income Tax Law 
"marked the abandonment of the attempt to levy personal prop- 
erty taxes upon" securities and credits. 29 Whether it was called 
to the attention of the Supreme Court that Wisconsin also allowed 
taxes on chattels to be deducted from the assessment of the in- 
come tax does not appear; but such was the case, 30 and the Supreme 
Court would hardly have neglected to inquire about it had it been 
regarded as important. The general nature of the Wisconsin tax 
was thus summarized by Chief Justice Winslow of the Wisconsin 
supreme court in an opinion rendered in 191 2: 

"By the present law it is quite clear that personal property taxation 
is for all practical purposes becoming a thing of the past. The specific 
exemptions of all money and credits and the great bulk of stocks and 
bonds, as well as of all farm machinery, tools, wearing apparel, and 
household furniture in actual use, regardless of value, goes far to elimi- 
nate taxation of personal property; while the provision that he who 
pays personal property taxes may have the amount so paid credited on 
his income tax for the year seems to put an end to any effective taxation 
of personal property. That taxation of such property has proven a 
practical failure will be admitted by all who have given any attention 
to the subject. Doubtless this was one of the main arguments in the 
legislative mind for the passage of the present act. By this act the 
legislature has, in substance, declared that the state's system of taxa- 
tion shall be changed from a system of uniform taxation of property 
(which so far as personal property is concerned has proven a failure) to 

28 247 U. S. 132, 38 Sup. Ct. Rep. 444 (1918). 

29 247 U. S. 132, 136*38 Sup. Ct. Rep. 444 (1918). 

30 Wisconsin Stat. (1915), chap. 48 a, § 1087 m-26. 



644 HARVARD LAW REVIEW 

a system which shall be a combination of two ideas, namely, taxation 
of persons progressively, according to ability to pay, and taxation of 
real property uniformly, according to value." 31 

Thus the Wisconsin tax was substantially one in lieu of all 
other taxes except those on real estate. Unlike the gross-receipts 
tax on insurance companies sustained in Northwestern Mutual Life 
Insurance Co. v. Wisconsin. , 32 the net-income tax included the in- 
come from real estate, 33 so that the economic interest in land was 
taxed twice. Such a double burden might conceivably have raised 
a question under the commerce clause in the case of railroads had 
they been subject to the income tax. If the assessment of their 
real estate took account of the value contributed by the use to 
which it was put, and the value of that use was again tapped by 
an income tax, there would be some basis for a contention that the 
state had created a tax system whereby interstate carriers were 
taxed more heavily than many kinds of local business. In Wis- 
consin, however, railroads are not subject to the income tax, but 
are assessed by the ad valorem method which in practice gets at 
the "intangible" value contributed by the income. 34 And chattels 
and intangibles pay but one tax. The Supreme Court, however, 
did not mention this element in the situation before it. It would 
seem, then, that it means to allow a general state tax on net in- 
comes to take toll from interstate commerce, even though the tax 
is in addition to familiar and customary levies on chattels and 
choses in action. This, however, is the inference from silence and 
neglect, and not from anything vocal. Explicit consideration may 
move the court to a different conclusion. 

If we may assume that a state is determined that state and local 
governments are to get a definite amount of revenue, the question 
whether a general income -tax is in lieu of other demands does not 
seem of great importance. Such an income tax is pro tanto in lieu 
of other demands, whether specific property is exempted or not, 
since it necessarily reduces the assessment or the rate of levy on 
other sources of revenue. Our assumption that some predeter- 

31 Income Tax Cases, 148 Wis. 456, 505-06, 134 N. W. 673 (191 2). 

32 Note 28, supra. See page 135 of the opinion. See also Wisconsin Stat. (1915), 
chap. 51, § 51.32 (1) (page 867). 

33 Wisconsin Stat. (1915), chap. 48 a, § 1087 m-2. 2 (a). 

34 See Superior v. Allouez Bay Dock Co., note 15, supra. See also Wisconsin 
Stat. (1915), chap. 48 a, § 1087 m-$ (2)., and chap. 51. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 645 

mined amount is certain to be raised by the state, whatever the 
methods adopted, is of course open to question. The actual situa- 
tion may be one in which an income tax is not a substitute for 
other demands, but is the only feasible method of obtaining addi- 
tional revenue. But even so, if the income tax does not bear more 
heavily on interstate business than on local business, there seems 
to be no controlling reason why the interstate business should be 
held inviolate, whether the income tax is supplementary to, or in 
lieu of, other taxes. 

The opinion of the Supreme Court in United States Glue Co. v. 
Oak Creek 35 shakes the criticism heretofore 36 passed upon Baldwin 
Tool Works v. Blue, 37 in which the federal district court for the 
northern district of West Virginia sustained the West Virginia ex- 
cise on corporations. Judge Pritchard supported the inclusion of 
net receipts from interstate commerce on the authority of the de- 
cisions approving the assessment of railroad property by capital- 
izing net earnings, 38 and sanctioning a gross-receipts tax in lieu of 
others. 39 He appears to minimize the issue unduly when he says: 

"While the statute imposes a special tax in addition to other license 
taxes, ascertained in some instances by the income that may arise in 
interstate transactions, nevertheless this is not a tax upon interstate 
commerce, nor can we conceive of any theory upon which it may be 
properly said to be a burden upon interstate commerce." 40 

Judge Pritchard evidently proceeds upon the familiar and some- 
what exploded distinction between the subject and the measure of 
the tax, when he argues that "the fact that the measure of that 
tax may be determined partly from the business of an interstate 
character could not be said to be such an interference with inter- 
state commerce as to render the act unconstitutional." 41 He does 
not mention Galveston, H. & S. A. Ry. Co. v. Texas, 42 nor indicate 

35 Note 2, supra. 

36 31 Harv. L. Rev. 760-75. In making this criticism, the writer proceeded on the 
assumption that there was no distinction between an excise measured by net earnings 
and one measured by gross receipts. 

37 240 Fed. 202 (1916). 

38 Cleveland, C, C. & St. L. Ry. Co. v. Backus, 154 U. S. 439, U Sup. Ct. Rep. 
1122 (1894). 

39 United States Express Co. v. Minnesota, 223 U. S. 335, 32 Sup. Ct. Rep. 211 
(1912). 

40 240 Fed. 202, 205 (1916). a Ibid., 206. 

42 210 U. S. 217, 28 Sup. Ct. Rep. 638 (1908), 32 Harv. L. Rev. 385/. 



646 HARVARD LAW REVIEW 

that he would have decided differently had the tax been measured 
by gross, rather than by net, income. But the distinction between 
the two, elaborated and relied on by the Supreme Court in the 
Oak Creek case, may be found sufficient to support the West Vir- 
ginia excise, even though it falls only on corporations and is in 
addition to other demands. 

As to corporations engaged partly in local business, there is no 
question of taxability, and the measure of the tax may be forgiven 
on the ground of its indirect effect on interstate commerce and the 
remnant of arbitrary power over domestic corporations and over the 
local business of foreign corporations. Where this arbitrary power 
has thus far been curbed, the complaint was against the extra- 
territorial incidence of the tax. 43 In view of the decision in the 
Oak Creek case that a general tax on net income does not regulate 
interstate commerce by including income from that commerce, an 
excise on all corporations may be deemed to have sufficient gener- 
ality to be accorded similar recognition. Some weight, however, 
should be given to the probability that the exemption of farmers, 
merchants and others conducting business as individuals from 
burdens borne by corporations will tend to relieve a considerable 
proportion of local business from demands that few engaged in 
interstate commerce will escape. Here is a fighting chance for the 
contention that an income tax applicable only to corporations 
must by and large bear more heavily on interstate business than 
on local business, and therefore amounts to an unconstitutional 
regulation of interstate commerce. 

Foreign corporations engaged exclusively in interstate commerce 
have still a stronger ground on which to resist the West Virginia 
tax. For anything thus far decided, such corporations would seem 
still to have the shield that they are not subject to an excise tax, 
no matter how it is measured. The subject selected for taxation 
has long been regarded as immune from the jurisdiction of the 
state. If the Cheney Brothers Company u and the York Manu- 
facturing Company 45 were permitted to disregard the corporation 
laws of Massachusetts and of Texas respectively, because they 

43 See 32 Harv. L. Rev. 384-417. See also Henderson, "The Position of Foreign 
Corporations in American Constitutional Law," 2 Harvard Studies in Jurispru- 
dence, chapters VII, VIII, and IX. 

44 Cheney Brothers Co. v. Massachusetts, note 12, supra. 
46 York Manufacturing Co. v. Colley, note 12, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 647 

were foreign corporations engaged exclusively in interstate com- 
merce, it would seem to follow that they and those like them are 
similarly immune from West Virginia's excise on corporations. It 
cannot be said of this tax, as Mr. Justice Pitney said of the Wis- 
consin income tax, that "such a tax, when imposed upon net 
incomes from whatever source arising, is but a method of distrib- 
uting the cost of government, like a tax upon property, or upon 
franchises treated as property." 46 The subject taxed is not in- 
come, but doing business in corporate form. The tax does not fall 
on "net incomes from whatever source arising," but only on net 
incomes arising from the exercise of corporate functions. When 
those functions are exclusively interstate commerce, and the cor- 
poration is foreign rather than domestic, a tax on the exercise of 
those functions is called a tax "on interstate commerce itself," 
and therefore without the fold of state power. 

There can be no question that this is a correct statement of the 
law to be induced from the Supreme Court decisions to date. 
Whether the law will continue as it now is does not admit of the 
same confident assertion. If we assume that foreign corporations 
engaged exclusively in interstate commerce may be subjected to a 
general state tax on net income, 47 and that foreign corporations 
engaged in combined local and interstate commerce cannot exclude 
interstate income from a state excise on all corporations measured 
by their net income from all business within the state, 48 there 
seems no reason in sense or in economics why a foreign corporation 
engaged exclusively in interstate commerce should be relieved from 
an excise imposed equally on all corporations. Their interstate 
income should be no more sacrosanct than is that of the foreign 
corporations which are fortunate or unfortunate enough to enjoy 
some local income in addition. But the West Virginia statute calls 
its exactions on corporations "an annual special excise tax for the 
privilege of carrying on or doing business in the state"; 49 and 
under all the law that we know from existing cases the privilege 
of carrying on interstate commerce alone or the doing of interstate 
business alone is not a taxable subject. West Virginia does not 
impose its tax "on net income" received by corporations, but "on 

46 Cit. supra, note 9. 47 See supra, pages 636-39. 

48 See supra, pages 645-46. » 

49 The West Virginia statute is quoted more at length in 31 Haev. L. Rev. 761. 



648 HARVARD LAW REVIEW 

the privilege of carrying on . . . business." The net income is 
the "measure," and not the "subject," of the tax. Granting 
arguendo that the net income of all corporations from whatever 
source derived is a proper subject of state taxation, that is not 
the legal res which West Virginia has named as the object of its 
desire. The Supreme Court must rewrite the West Virginia stat- 
ute in order to escape from the decisions 50 which hold that inter- 
state commerce, whether done by individuals or by corporations, 
is not a legitimate subject of state taxation. 

The court has consistently declined to rewrite statutes or ordi- 
nances imposing specific taxes on the privilege of doing any business 
whatever, 51 even though the identical tax might be imposed on 
local business alone. 52 It has, however, held that the nominal 
subject of the tax was not the actual subject, when taxes purport- 
ing to be on the privilege of a foreign corporation to engage in 
local business have been discovered to be substantially taxes on 
extra-state property of the corporation because measured by total 
capital stock. 53 The developments since 1910 show the waning of 
the once controlling influence of the formal distinction between the 
subject and the measure of the tax. Unless the court is to be more 
zealous to discover vice than virtue, it may as easily hold that a 
tax in substance laid on the net income of all corporations will be 
dealt with as such a tax, in spite of the fact that it is called by the 
statute an annual special excise for the privilege of carrying on 
business. 

Precedent for such action is not .wanting. In Postal Telegraph 
Cable Co. v. Adams, 54 as we have seen, a tax described by the statute 
as a privilege tax was held to be a levy on the property of the com- 
pany and therefore a valid demand. Similar courtesies have been 
shown to other taxes found to be in lieu of property taxes. 55 If a 

60 Some of these decisions are cited in 32 Harv. L. Rev. 380, note 34. 

61 Cases cited in 32 Harv. L. Rev. 411, note 146. 

52 Osborne v. Florida, 164 U. S. 650, 17 Sup. Ct. Rep. 214 (1897). See infra, pages 
669-70. 

63 31 Harv. L. Rev. 584-618, considering the Western Union case and those fol- 
lowing it. 

54 155 U. S. 688, is Sup. Ct. Rep. 268 (1895); 32 Harv. L. Rev. 249. 

65 See 32 Harv. L. Rev. 389. For an instance of judicial rewriting of a statute 
to relieve a tax of the charge of being an imposition on an instrumentality of the 
federal government, see Western Union Telegraph Co. v. Massachusetts, 125 U. S. 
530, 8 Sup. Ct. Rep. 961 (1888), 32 Harv. L. Rev. 239. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 649 

verbal defect was forgiven in these cases, there is no apparent com- 
mon-sense reason why it should not be forgiven in West Virginia's 
excise on corporations. Once it is granted that a tax on the net 
income of all corporations need not loose its hold when it comes to 
income from interstate commerce, even though such income is all 
that a complaining foreign corporation receives, there is no sub- 
stantial ground for sparing such income because the tax calls itself 
an excise on doing business rather than a tax "on net income re- 
ceived by corporations." It is to be anticipated, therefore, that 
the Supreme Court, if it determines to treat a tax on corporate 
income in the same way that it regarded Wisconsin's tax on all in- 
come, will find little difficulty in taking the further step that a tax, 
though formally on the business itself, is substantially on the net 
income from that business and is therefore entitled to the same 
consideration that would be bestowed on a tax designated as one 
on such net income. 

There remains for consideration the bearing of the commerce 
clause on complaints of the vice of extra-territoriality in the assess- 
ment of an income tax. It has already been suggested that the 
legal status of the recipient of income may be a factor in cases 
where it is objected that a state has levied on income from extra- 
state sources or on income to which extra-state activities have con- 
tributed. In dealing with such complaints it will be necessary to 
determine what basis or bases of jurisdiction underlie the imposi- 
tion of income taxes. The Western Union case and those follow- 
ing it establish that the taxation of foreign corporations engaged 
in interstate commerce by a method which takes account of extra- 
state values is an invalid regulation of interstate commerce as well 
as a denial of due process of law. This doctrine must apply to 
taxes on income or to taxes measured by income as forcibly as to 
taxes measured by property. Plainly foreign corporations engaged 
wholly or partly in interstate commerce can insist that extra-state 
income as well as extra-state property is beyond the reach of the 
state by direct or indirect action. 

What can be done with foreign corporations engaged exclusively 
in local business does not fall strictly within the scope of this study, 
although the cases that have been reviewed are the ones which throw 
light on the problem. If Horn, Silver Mining Co. v. New York 56 

66 143 U. S. 305, 12 Sup. Ct. Rep. 403 (1892). 



650 HARVARD LAW REVIEW 

is still law, it would seem that such foreign corporations may- 
be subjected to an excise measured by their total income as 
readily as to one measured by their total capital stock. The possi- 
bility of the early demise of the Horn case has already been sug- 
gested. 57 Mr. Henderson in his admirable study of The Position 
of Foreign Corporations in American Constitutional Law 58 argues 
forcibly for the view that the decision must be regarded as already 
abandoned. 59 This is a legitimate inference from the opinion of 
Mr. Justice Van Devanter in International Paper Co. v. Massa- 
chusetts, 60 in which the due-process objections to an excise measured 
by extra-territorial values appear to be treated as entirely inde- 
pendent of the commerce clause. The opinion of Mr. Justice 
Holmes in Equitable Life Assurance Society v. Pennsylvania 61 may 
also be taken as an implied obituary of the Horn case. This case 
sustained a tax on a foreign insurance company which included a 
percentage of premiums paid in other states on policies on the lives 
of residents of the taxing state, notwithstanding the ruling that 
such premiums, separately considered, afford no basis for a tax on 
a company that has ceased to solicit business or to collect premi- 
ums in the taxing state. 62 Though the Equitable case came within 
the doctrine of arbitrary power declared in the Horn case, it was 
not put on that ground by the court. Instead, Mr. Justice Holmes 
pointed out that many incidents of the contracts insuring the lives 
of residents were likely to be attended to in Pennyslvania, such as 
the payment of dividends and the adjustment of claims, and added : 

"It is not unnatural to take the policy holders residing in the State as 
a measure without going into nicer if not impracticable details. Taxa- 
tion has to be determined by general principles, and it seems to us 
impossible to say that' the rule adopted in Pennsylvania goes beyond 
what the Constitution allows." K 

" 31 Harv. L. Rev. 613, 758, 759. 

68 Henderson, "The Position of Foreign Corporations in American Constitutional 
Law," 2 Harvard Studies in Jurisprudence, Cambridge, Harvard University- 
Press, 1918. 

59 For a statement of Mr. Henderson's argument, and a presentation of considera- 
tions against its validity as an expression of the present state of the law, see $s Polit- 
ical Science Quarterly, 558-65. 60 246 U. S. 135, 38 Sup. Ct. Rep. 292 (1918). 

61 238 U. S. 143, 35 Sup. Ct. Rep. 829 (1915). 

62 Provident Savings Life Assurance Society v. Kentucky, 239 U. S. 103, 36 Sup. 
Ct. Rep. 34 (1915). 

63 238 U. S. 143, 147, 35 Sup. Ct. Rep. 829 (1915). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 651. 

Here is a pretty plain implication that an excise measured by pre- 
miums which have no relation whatever to the taxing state would 
have gone beyond what the Constitution allows. The states, there- 
fore, have had a clear warning of the risks they run in seeking to 
levy on the extra-state income of any foreign corporation. 

Such taxation of extra-state income can be justified, if at all, 
only by the possession of some power over the recipient. The 
income, as such, is not taxable by a state which has no other rela- 
tion towards it than that of covetousness. It is at best exceed- 
ingly doubtful whether the requisite power exists over any foreign 
corporation. As to domestic corporations the case is not so clear. 
Such corporations, whatever their business, may be subjected to 
any demand exacted as a price for the privilege of coming into 
being. 64 Through control over the corporate entity en ventre sa 
mere, the state may accomplish indirectly what it cannot attain 
directly. With reserved power to amend or repeal the corporate 
charter, this initial arbitrary power may possibly be transformed 
into a continuing one. But, if so, it must be exercised as an asser- 
tion of such arbitrary power, or else find adequate justification on 
independent grounds. This appears clearly from Mr. Justice 
Harlan's opinion in Louisville & Jeffersonville Ferry Co. v. Ken- 
tucky, 65 in which it was held a taking of property without due 
process of law to include in the valuation of the Kentucky fran- 
chise of an interstate ferry the value of the Indiana franchise of 
the same concern. After stating the conclusion that Kentucky 
cannot in effect tax the incorporeal hereditament which has its 
situs in another state, Mr. Justice Harlan continues: 

"This view is not met by the suggestion that Kentucky can make it 
a condition of the exercise of corporate powers under its authority that 

64 Railroad Co. v. Maryland, 21 Wall. (U. S.) 456 (1874), 31 Harv. L. Rev. 578; 
Ashley v. Ryan, 153 U. S. 436, 14 Sup. Ct. Rep. 865 (1894), 31 Harv. L. Rev. 580; 
Kansas City, M. & B. R. Co. v. Stiles, 242 U. S. in, 37 Sup. Ct. Rep. 58 (1916), 
31 Harv. L. Rev. 599. The same rule is assumed to apply to charter requirements 
of a police nature. Louisville & N. R. R. Co. v. Kentucky, 161 U. S. 677, 16 Sup. 
Ct. Rep. 714 (1896). But intimations that some or all of the justices have doubts as 
to whether charter provisions may inevitably be enforced under all future circum- 
stances appear in Interstate Consolidated Street Railway Co. v. Massachusetts, 207 
U. S. 79, 28 Sup. Ct. Rep. 26 (1907), International & G. N. Ry. Co. v. Anderson 
County, 246 U. S. 424, 38 Sup. Ct. Rep. 370 (1918), and Detroit United Ry. Co. v. 
Detroit, 39 Sup. Ct. Rep. 151 (1919). 

66 188 U. S. 385, 23 Sup. Ct. Rep. 463 (1903). 



652 HARVARD LAW REVIEW 

the tax upon the franchise granted by it shall be measured by the value 
of all its property, wherever situated, of whatever nature, or from 
whatever source derived. It is a sufficient answer to this suggestion to 
say that no such condition was prescribed in the charter of the ferry 
company when it was granted and accepted. Nor does the taxing statute 
in question make it a condition of the ferry company's continuing to 
exercise its corporate powers that it shall pay a tax for its property 
having a situs in another State. There is no suggestion in the com- 
pany's charter that the State would ever, in any form, tax its property 
having a situs in another State. We express no opinion as to the valid- 
ity of such a condition if it had been inserted in the company's charter, 
or if it were now, in terms, prescribed by any statute. We decide noth- 
ing more than it is not competent for Kentucky, under the charter 
granted by it, and under the Constitution of the United States, to tax 
the franchise which its corporation, the ferry company, lawfully ac- 
quired from Indiana, and which franchise or incorporeal hereditament 
has its situs, for purposes of taxation, in Indiana." 66 

Owing to this disposition of the case, the court did not consider 
whether the tax complained of was an unlawful burden on inter- 
state commerce. 

Thus the court leaves open the question whether a state may 
tax domestic corporations as it pleases, provided it specifically 
bases its demand on its control over the continued existence of the 
corporation. This question was left open also by Kansas City, 
M. & B. R. Co. v. Stiles, 67 which was careful to adduce in support 
of an excise measured by total capital stock the fact that the law 
was in force when the corporation begged for birth. 68 The Supreme 
Court is still free to apply the doctrine of the Western Union case 
to domestic corporations which are not under some fairly clear 
contractual disability to object to the demand complained of. 
Whether it will do so is still uncertain. Whether it should do so 
is a question on which disagreement is not difficult. In the opin- 
ion of the writer, the less we have in our constitutional law of 
arbitrary power on the part of one state to deal as it will with 
affairs in other states, the better. If a tax is not constitutional by 

66 188 U. S. 385, 23 Sup. Ct. Rep. 398 (1903). " Note 64, supra. 

68 For example, the passage quoted in 31 Harv. L. Rev. 599: "The railroads com- 
prising this consolidation entered upon it with the Alabama statute before them and 
under its conditions, and, subject to constitutional objections as to its enforcement, 
they cannot be heard to complain of the terms under which they voluntarily invoked 
and received the grant of corporate existence from the state of Alabama." 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 653 

reason of its own intrinsic merit or absence of sufficient demerit, 
there is something artificial and unwholesome in making it con- 
stitutional by endowing a state with a club which it may brandish 
at will. A tax on the extra-state income of a domestic corporation, 
if not good as an exercise of the taxing power, does not, as an 
original proposition, present a strong claim for recognition as an 
exercise of unlimited power over corporate creatures. It no longer 
fits the facts to treat the grant of a corporate charter as a bestowal 
of gracious favor by an act of high prerogative. In most instances 
it is today a mere record of a situation that by common consent 
is one demanded by the exigencies of normal business intercourse. 69 
Even if it is held that a state is subject to limitations in wield- 
ing the taxing power by way of the amendment of corporate char- 
ters, there still remains the question whether a tax on the total 
net income of a domestic corporation can not stand on its own legs. 
New York, 70 Wisconsin, 71 Montana, 72 Connecticut 73 and West 
Virginia 74 ask domestic corporations to pay only on the income 
earned from business within the state, or on the proportion of 
total income roughly estimated to have been earned within the 
state. Montana, ex abundantia cautelae or inspired by benevolence, 
excludes income from interstate commerce. Missouri 75 and Vir- 
ginia, 76 however, take toll from all income no matter whence de- 
rived. As the profits from local or interstate commerce in other 
states increase, the revenues of the chartering state wax corre- 
spondingly. A historian might be reminded of a famous tea party, 
but we are thinking of the Constitution that followed after. 
Should the fact that the recipient of extra-state income is a domes- 
tic corporation justify a tax on that income? If such income is 

69 For elaboration of this position, to which the writer acknowledges his indebt- 
edness, see Gerard Carl Henderson, "The Position of Foreign Corporations in 
American Constitutional Law," 2 Harvard Studies in Jurisprudence, chap. X. 
While Mr. Henderson is dealing primarily with foreign corporations, his analysis, it 
is submitted, applies in considerable degree to domestic corporations as well. 

70 Laws of New York (1917), chap. 726, § 214. See note 91, infra, for reference 
to later amendment. 

71 See note 91, infra. 

72 Laws of Montana (191 7), chap. 79. 

73 Acts of 191 5, chap. 292; General- Statutes of Connecticut (Revision of 1918), 
chap. 73, §§ 1391, 1394. 

74 Acts of West Virginia, Second Extraordinary Session, 1915, chap. 3. 
78 Laws of Missouri, 1917, 528. S. B. 415, § 7. 

76 4 Virginia Code Annotated (Supplement, 1916), 552. 



654 HARVARD LAW REVIEW 

from interstate commerce, is a tax thereon a regulation of that 
commerce "in a constitutional sense"? 

In considering the question, let us assume that an individual 
may be taxed at his domicil on all net income which comes to his 
coffers, for so the law is likely to be. It does not accord with 
traditional views of the law to declare that a state's power over 
artificial persons of its own creation is less than that over man 
that is born of woman. Nevertheless it is submitted that the Su- 
preme Court would do well so to hold with, respect to the matter 
now under consideration. A corporation does not send its children 
to school; it does not vote for governor; it does not make a will; 
it does not marry or give in marriage. It is a business mechanism, 
and nothing more. It is a medium by which income is made and 
distributed. In so far as the process is local to the taxing state, 
the fruits thereof should be taxed. But there are several reasons 
which justify taxing an individual on his total net gain at the 
place where he makes his permanent home, that do not apply to 
a similar tax on a corporation. The individual is the terminus of 
the income. The termini of corporate income are often individuals 
in other states. The assimilation of a corporation to a natural 
person may for many purposes be a convenient fancy, but it should 
not blind us to essential differences that ought for other purposes 
to be controlling. The crucial question is whether business, as 
business, should be taxed elsewhere than where it is carried on. 
It is agreed that it should be taxed there. If it is taxed elsewhere 
as well, the burden is cumulative. When the corporate income 
passes on to the individuals who are in reality the corporation, it 
may be taxed again. Granting that some double taxation is neces- 
sary, or even desirable, it is possible to have too much of it. No 
more feasible spot for elision of double taxation can be found than 
the extra-state income of a corporation. The majority of the 
states which have thus far imposed taxes on the net income of 
corporations have discovered this for themselves. While the con- 
stitutionality of such reaping where a state has not sown is still 
undetermined, the Supreme Court would do well to consider the 
problem in all of its practical bearings, and not follow blindly 
some metaphysical conceptions of the nature of the corporate en- 
tity and questionably broad declarations as to the power of a 
state over its mystical being. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 655 

It has already been recognized that natural persons stand in a 
different relation to the state of their choice than does a corpora- 
tion. From domiciled individuals a state may with propriety ex- 
act tribute from all their gains. No serious question is likely to 
arise as to the taxation at the domicil of the recipient of income 
from intangibles which are relieved of other burdens. If the prop- 
erty is taxable to the owner on the principle of mobilia sequuntur 
personam, 77 the income therefrom should receive similar treatment. 
But income from extra-state realty and from extra-state business 
may conceivably stand on a different footing. A tax on the former 
is not likely to raise any question under the commerce clause, even 
when the recipient is engaged in interstate commerce. His inter- 
state business is not less profitable because he gets less from other 
sources. The only complaint against a tax on income from extra- 
state realty would be based on the denial of due process of law. 
The argument would be that, as the source of the income is beyond 
the jurisdiction, the income is also. Pollock v. Farmers' Loan &° 
Trust Co. 78 would naturally be relied on to support such a con- 
tention, but the issue in that case can be distinguished from 
that now under consideration. The source of income may deter- 
mine whether a tax thereon is a direct or indirect tax within the 
meaning of the fourth clause of Article I, section 9, of the federal 
Constitution, 79 and still not determine whether there is state juris- 
diction within the limitations of the Fourteenth Amendment. An 
expression of Mr. Justice Holmes in the latest case on the taxation 
of intangibles to their owner at his domicil has possibilities of 
application to the taxation of income: 

"The present tax is a tax upon the person, as is shown by the form of 
the suit, and is imposed, it may be presumed, for the general advan- 
tages of living within the jurisdiction. These advantages, if the State 

77 Kirtland v. Hotchkiss, 100 U. S. 491 (1879), is the leading case. See Charles E. 
Carpenter, "Jurisdiction over Debts for the Purpose of Administration, Gar- 
nishment, and Taxation," 31 Harv. L. Rev. 905, for the most recent review of 
the authorities. 

78 158 U. S. 601, 15 Sup. Ct. Rep. 912 (1895). This case held that a tax on the 
income from land is the same as a tax on the land itself from the standpoint of the 
question whether the tax is direct or indirect. 

79 "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the 
Census or Enumeration herein before directed to be taken." This provision is modi- 
fied, in so far as its application to taxes on income, by the Sixteenth Amendment. 



656 HARVARD LAW REVIEW 

so chooses, may be measured more or less by reference to the riches of 
the person taxed." 80 

To this is added : 

"It is unnecessary to consider whether the distinction between a tax 
measured by certain property and a tax on that property could be in- 
voked in a case like this. Flint v. Stone Tracy Co., 220 U. S. 107, 146, 
162 et seq. Whichever this tax technically may be, the authorities show 
that it must be sustained." 81 

80 Fidelity & Columbia Trust Co. v. Louisville, 245 U. S. 54, 58, 38 Sup. Ct. Rep. 
40 (1917). 

81 Ibid., 59. This passage was quoted by Chief Justice Rugg of the Massachusetts 
supreme court in Maguire v. Tax Commissioner, 230 Mass. 503, 510-11, 120 N. E. 
162 (1918), which sustained the power of Massachusetts to tax income received by a 
Massachusetts cestui from a Pennsylvania trust. "That reasoning," said the Chief 
Justice, "appears to us to be equally applicable to the facts here disclosed. ... It 
is of no consequence in this aspect whether the tax is levied on income in truth re- 
ceived by the resident taxpayer from intangible property held for his benefit by a 
trustee resident in a sister State or on intangible property owned by the taxpayer but 
all in fact kept by him in a sister State. There is not apparent to us any difference in 
principle between the two cases" (230 Mass. 503, 511). 

It is interesting to note that the Massachusetts court calls the income tax a prop- 
erty tax and justifies it as such, and then adds further justification which seems to 
proceed on the notion that it is tax on the person rather than one on property. Evi- 
dently the nomenclature is not of controlling importance. Substantial considerations 
of public policy appear to be the basis on which the taxability of residents on income 
from extra-state sources is sustained. The pertinent paragraphs of the opinion are 
as follows: "The cestui que trust has important legal rights respecting the trust fund 
which are personal to her. They are rights in the nature of property. They cannot 
be taken away from her by arbitrary or irrational procedure. They attach to her 
person wherever she goes. One of these is the right to receive the income. That is 
a property right. The income when received is property. The tax here in question 
is a property tax. Tax Commissioner v. Putnam, 227 Mass. 522, 531, 532. Whether 
it be regarded as a tax on the right of the cestui que trust or a tax on the income as 
received, in either event a property tax is permissible. Of necessity a tax on income 
requires time as an element in its calculation. It must be levied on the income re- 
ceived during a period of time. It is not necessary that income be reinvested before 
it can be taxed. It may be spent as received and yet be subject to taxation. The 
contention of the petitioner in principle reaches much further than to the facts of 
the present case. In its logical application and extension it apparently would render 
invalid income from annuities, certificates in partnerships, associations and trusts, 
and perhaps other sources, originating in sister States, and not having a place of 
business in this Commonwealth. Of course, if the principle is sound, its disturbing 
effect is no argument against its recognition and adoption. But a contention which 
in its results would seriously cripple the practical operation of any comprehensive 
system of State income taxation has no presumption in its favor and ought not to 
be adopted except because of compelling considerations. We perceive no such re- 
quirement as to the tax here in controversy. Whatever may be the effect of Pollock 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 657 

The Stone Tracy case sustained the federal corporation tax of 
1909 and sanctioned the inclusion of income from municipal bonds 
and other securities not directly taxable by the federal government. 
The distinction between the subject and the measure of the tax 
was the magician's wand used to wave away crucial difficulties 
and avoid analysis of pertinent issues. Referring to Galveston, 
H. & S. A. R. Co. v. Texas 82 and Western Union Telegraph Co. v. 
Kansas 83 Mr. Justice Day declared authoritatively: 

"There is nothing in these cases contrary, as we shall have occasion 
to see, to the former rulings of this court which hold that where a tax 
is lawfully imposed upon the exercise of privileges within the taxing 
power of the State or Nation, the measure of such tax may be the in- 
come from the property of the corporation, although a part of such 
income is derived from property in itself non-taxable. The distinction 
lies between the attempt to tax the property as such and to measure a 
legitimate tax upon the privileges involved in the use of such property." S1 

Whether this distinction survived the Western Union case in sound 
logic we need not pause to inquire. It is enough for our present 
purpose that it survived that case in the mind of the Supreme 
Court. It is still available as an ever-present help in time of logi- 
cal trouble. It is quite as applicable to a state tax on the privi- 
lege of its citizens to be domiciled within the jurisdiction as to a 
federal tax on doing business in corporate form. If it seems wise 
to measure a personal income tax by all income, from whatever 

v. Farmers' Loan &° Trust Co., 157 U. S. 429, 581; s. c. 158 U. S. 601, and Brushaber 
v. Union Pacific Railroad, 240 U. S. 1, 16, 17, upon the nature of the tax here in 
question under the Constitution of the United States, no binding decision appears 
. to us to require that this tax be declared invalid. There is nothing inconsistent with 
the conclusion here reached in Walker v. Treasurer &* Receiver General, 221 Mass. 600. 
"The income tax is measured by reference to the riches of the person taxed actually 
made available to him for valuable use during a given period. It establishes a basis 
of taxation directly proportioned to ability to bear the burden. It is founded upon 
the protection afforded to the recipient of the income by the government of the 
Commonwealth of his residence in his person, in his right to receive the income, and 
in his enjoyment of the income when in his possession. That government provides 
for him all the advantages of living in safety and in. freedom and of being protected 
by law. It gives security to life, liberty, and the other privileges of dwelling in a 
civilized community. It exacts in return a contribution to the support of that govern- 
ment measured by and based upon the income, in the fruition of which it defends 
him from unjust interference" (Ibid. 512-13). 

82 210 U. S. 217, 28 Sup. Ct. Rep. 638 (1908), 32 Harv. L. Rev. 385/. 

83 216 U. S. 1, 30 Sup. Ct. Rep. 190 (t ? 9io), 31 Harv. L. Rev. 584 jf. 

84 220 U. S. 107, 163-64, 31 Sup. Ct. Rep. 342 (191 1). 



658 HARVARD LAW REVIEW 

source derived, the Supreme Court has at its right hand the neces- 
sary formula to support the exaction. If it seems unwise, the 
Western Union case and those following it are within easy reach 
of the left hand to rind constitutional defects. 

It is to be anticipated that the right hand will be chosen for 
dealing with income from extra-state realty. If the mortgagee of 
such realty may be taxed at his domicil on the obligation of the 
mortgagor, 85 it is hard to see why the owner should not make a 
contribution from his rent. A more serious question arises in re- 
spect to income from extra-state interstate commerce. Unless all 
signs fail, such income will be held taxable where the commerce is 
carried on. 86 Ought the same income from interstate commerce 
to be taxed by two states on different conceptions as to what is 
being taxed? It is too late to raise the general question whether 
bi-state double taxation should be allowed at all. The Supreme 
Court has not seen its way to declare that such double taxation is 
inconsistent with the Constitution. 87 But it has several times 
scotched double taxation of interstate commerce by a single state. 88 
In these instances, however, the court was not dealing with taxa- 
tion that fell on all business and all persons alike. It had before 
it the possibility or actuality of heavier burdens on interstate com- 
merce than on other business. Where this possibility is foreclosed 
by general state taxation on all personal incomes received by citi- 
zens and on all business incomes from business within the terri- 
tory, there is strong ground for the contention that interstate com- 
merce should not be subsidized by exemption from burdens that 
other business must bear. Such a contention seems in substantial 
accord with the analysis of the results reviewed in this study. 

Where power over the person is lacking, and an income tax 
must depend for its validity on power over the income itself, it is 
clear that extra-state income must be excluded from the computa- 
tion. 89 Without doubt the Supreme Court will soon be called upon 

85 Kirtland v. Hotchkiss, note 67, supra. 

86 See supra, pages 635-40. 

87 The cases are reviewed in Mr. Carpenter's article cited in note 77, supra. 

88 Fargo v. Michigan, 121 U. S. 230, 7 Sup. Ct. Rep. 857 (1887); Western Union 
Telegraph Co. v. Texas, 105 U. S. 460 (1881); Galveston, H. & S. A. Ry. Co. v. Texas, 
210 Ul S. 217, 28 Sup. Ct. Rep. 638 (1008), 32 Harv. L. Rev. 385/.; Meyer v. Wells, 
Fargo & Co., 223 U. S. 298, 32 Sup. Ct. Rep. 218 (1012). 

89 This is the rule as to chattels, even when there is power over the owner. Union 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 659 

to solve some pretty problems with respect to the so-called "situs" 
of income. Nonresidents and foreign corporations will seek sup- 
port from the Fourteenth Amendment and the commerce clause 
for complaints that states have allocated to themselves more in- 
come than belongs to them. When all the transactions out of 
which the income arises are in a single state, the disputes will not 
present great difficulty. But when the income-producing activi- 
ties straddle two states, and the acts in neither alone would yield 
the income, there is room for perplexity. The importance of the 
problem justifies a review of two cases which bear upon it, though 
neither touches it precisely, since in one the taxpayer was a domes- 
tic corporation, and in the other there was no element of interstate 
commerce. 

The first case is the decision of the Wisconsin supreme court in 

Refrigerator Transit Co. v. Kentucky, 199 U. S. 194, 26 Sup. Ct. Rep. 36 (1905); 
Delaware, L. & W. R. R. Co. v. Pennsylvania, 198 U. S. 341, 25 Sup. Ct. Rep. 669 
(1905). It is also the rule as to such an incorporeal hereditament as a franchise to 
run a ferry. Louisville & Jeffersonville Ferry Co. v. Kentucky, 188 U. S. 385, 23 
Sup. Ct. Rep. 463 (1903). The opinion in the Union Refrigerator case says that it 
has always been understood that the rule is the same as to extra-state realty. In all 
of the cases sustaining the taxation of choses in action, there was either power over 
the creditor or over some economic value behind the chose in action, or over some 
incidents thereof. 

The following excerpts from Mr. Justice Brown's opinion in the Union Refrigerator 
case are clearly applicable, mutatis mutandis, to income taxation: 

"The power of taxation, indispensable to the existence of every civilized govern- 
ment, is exercised upon the assumption of an equivalent rendered to the taxpayer in 
the protection of his person and property, in adding to the value of such property, 
or in the creation and maintenance of public conveniences in which he shares. . . . 
If the taxing power be in no position to render these services, or otherwise to benefit 
the person or property taxed, and such property be wholly within the taxing power 
of another State, to which it may be said to owe an allegiance and to which it looks 
for protection, the taxation of such property within the domicil of the owner partakes 
rather of the nature of an extortion than a tax, and has been repeatedly held by this 
court to be beyond the power of the legislature and a taking of property without due 
process of law. . . . 

"The argument against the taxability of land within the jurisdiction of another 
State applies with equal cogency to tangible personal property beyond the jurisdic- 
tion. It is not only beyond the sovereignty of the taxing State, but does not and 
cannot receive protection under its laws. True, a resident owner may receive an 
income from such property, but the same may be said of real estate within a foreign 
jurisdiction. Whatever be the rights of the State with respect to the taxation of 
such income, it is clearly beyond its power to tax the land from which the income is 
derived." 199 U. S. 104, 202-04. 

There can be no doubt whatever that power over and protection of the recipient 
or the sources of income will be held essential to jurisdiction to levy an income tax. 



660 HARVARD LAW REVIEW 

United States Glue Co. v. Oak Creek 90 — the same controversy 
which presented the income-tax problem to the United States 
Supreme Court. The Wisconsin law aimed to tax no "business 
income" that was not earned within the state, whether received 
by residents or non-residents. 91 The United States Glue Company 
did not contest before the state court the taxability of its income 
from rentals and intangibles, 92 nor does the case state the sources 
from which such income was derived. The matter in controversy 
was the income from sales. With the contention that such in- 
come was not taxable because of the commerce clause, we are no 

90 161 Wis. 211, 153 N. W. 241 (1915). 

91 Wisconsin Statutes (1915), chap. 48 a, § 1087 m-2 (3). "With respect to other 
income, persons engaged in business within and without the state shall be taxed only 
upon such income as is derived from business transacted and property located within 
the state, which may be determined by an allocation and separate accounting for such 
income when made in form and manner prescribed by the tax commission, but other- 
wise shall be determined in the manner specified in subsection (e) of subsection 7 of 
section 17706 of the statutes, as far as applicable." The section referred to pre- 
scribed a form of "unit rule," which applied the ratio between the sum of the gross 
business in dollars plus the value of the property in dollars within the state to an 
aggregate of the same two elements in all the states in which business was done. 

New York has a somewhat more complicated rule of apportionment for its corpo- 
rate income tax. In getting its ratio it takes account of the aggregate of the average 
monthly value of real property, chattels, bills and accounts receivable, and stocks of 
other corporations within the state and the aggregate of the same elements in all the 
states. Laws of New York, 1918, chap. 417, § 214 (vol. 2, 1262); Birdseye's Con- 
solidated Laws of New York, 1918 Supplement, 661. 

In the Wisconsin cases which have been found, the ratio method was not employed. 
In the Oak Creek case, specific consideration was given to the income from various 
sources. In State ex rel. Brenk v. Widule, 161 Wis. 396, 154 N. W. 696 (1915), an 
inheritance of foreign realty was held to be from sources without the state, and there- 
fore the court did not decide whether it was "income" within the meaning of the 
statute. In State ex rel. Arpin v. Eberhardt, 158 Wis. 20, 147 N. W. 1016 (1914), 
income received by a resident from a partnership whose business and property was 
wholly without the state was held not taxable under the statute. In commenting on 
the statute, Judge Barnes said: 

"Certain considerations occur to us which might have induced the legislature to 
refrain from taxing income derived from sources without the state except as specified. 
It was no doubt the desire of the legislature to prevent the loan or investment of 
moneys without the state for the purpose of receiving a fixed return for the invest- 
ment made so as to avoid the payment of a tax on this species of property. The 
property of this firm was taxable in the state where located. If incomes were taxed 
in that state, the income would also, in all probability, be taxed there. If the income 
were taxed here, it might be doubly taxed. Conceding the right to impose such double 
taxation, the legislature might well feel that it would not be just to do so. Other 
considerations might be mentioned, but those suggested should suffice." 158 Wis. 
20, 23-24. 92 161 Wis. 211, 215 (1915). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 66 1 

longer concerned. Our present interest is in the objection that the 
income from some of these sales was not derived from business 
transacted and property located within the state, and so not 
within the terms of the Wisconsin statute. 

The income covered by these objections included (i) that from 
goods sold and delivered from the Wisconsin factory to persons 
outside the state; (2) that from products of the Wisconsin factory 
shipped to extra-state branch houses and from there sold to cus- 
tomers outside Wisconsin; and (3) that from goods bought with- 
out the state, shipped to extra-state branches either directly 
or by way of the Wisconsin factory, and then sold and delivered 
from the extra-state branches to extra-state customers. 93 As to 
this last class of business the Wisconsin court held that the 
income therefrom was not from business or property within Wis- 
consin. But Wisconsin was declared to be the source of all in- 
come from sales of products of the Wisconsin factory including 
those of goods disposed of from the branch houses in other states. 
After saying that "the place of sale of such products does not 
change the place of business from this to the state where the goods 
are sold," 94 Judge Siebecker continued: 

"The transactions involved in producing the products at the plant at 
Carrollville and disposing of them through intra-state or interstate 
transactions are in substance and effect transacting business in this 
state, and the shipping and delivery of such goods on sales made at 
home or abroad, from either the factory or branch houses to which they 
had been shipped before sale, are no more than incidents in transacting 
the business of supplying the articles to customers in their finished state. 
We cannot, in the light of the nature of the general conduct of the busi- 
ness, assent to the claim that the shipping and delivery of goods, manu- 
factured at the plant, from branch houses are the controlling elements 
of such transactions and that they give such business a situs without 
the state. The manufacture, the management, and the conduct of the 
business at the home office are the controlling features in the process of 
disposing of the article produced at the factory and constitute the 
source out of which the income issues and give it a situs within the state 
under the Income Tax Law." 95 

This view of the "situs" of income invites examination. If the 
professed basis of the Wisconsin tax on business income is not 

93 161 Wis. 213-14, 153 N. W. 241 (1915). 

94 Ibid., 218. * Hid. 



662 HARVARD LAW REVIEW 

the subjection of the recipient to the power of Wisconsin, but the 
actual earning of the income in Wisconsin, Judge Siebecker dis- 
misses too cavalierly the alleged importance of the transactions 
without the state. The sales in another state to customers in that 
state are taxable in that jurisdiction as intra-state sales. 96 If the 
United States Glue Company is a wholesaler in Chicago as well as 
a manufacturer at Carrollville, Wisconsin, it must be subject to 
an Illinois income tax on all its Illinois business, unless the Supreme 
Court is going to insist that power over the person is the only 
basis on which income taxes may be levied. Even such insistence 
would not forbid Illinois taxation of Illinois intra-state sales. And 
if income from interstate commerce carried on by non-residents or 
by foreign corporations may be included in a state-wide tax on 
business income, Illinois may lay a tax on income from sales by 
Illinois wholesalers to customers in other states, even though the 
sales are of goods manufactured by the wholesaler at a Wisconsin 
factory. Plainly enough the manufacture, the wholesale establish- 
ment and the work of securing customers and of collecting bills 
are all essential to the making of a profit. No one of these three 
elements in the combined enterprise is a mere incident. A portion 
of the net income is due to each element. If sufficiently exquisite 
book-keeping were possible, each state should take only that por- 
tion of the income which is contributed by the acts done within 
its own borders. Judge Siebecker considers only two extreme al- 
ternatives, both of which miss the ideal solution. 

It may well be that the ideal solution is not attainable in prac- 
tice. But this is no reason why it should be neglected in consid- 
ering what is the best approximation that is feasible. Though 
manufacturing is for profit, the profit appears only in income from 
sales. The price which the product brings depends only in part 
on the excellence of raw materials and of shop management. The 
need or susceptibility of customers, the skill of the sales force, the 
wisdom in extending credit and energy in collecting accounts are 
not mere incidents, as Judge Siebecker would have us believe. 97 
Indeed they may in many instances be "controlling" in the 

98 Ratterman v. Western Union Telegraph Co., 127 U. S. 411, 8 Sup. Ct. Rep. 
1127 (1888). 

97 Judge Siebecker recognizes that these elements are of practical importance (161 
Wis. 211, 217), but calls them but "incidents" from a legal standpoint. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 663 

sense that they are the factors that make the difference between 
profit and loss. These factors in interstate sales all occur outside 
the state of manufacture. The manufacture without the customer 
would be as vain as the customer without the goods to sell him. 
The state where the solicitation is done and where accounts must 
be collected offers to the business the protection of its police offi- 
cials and its courts. If net income from interstate commerce is no 
longer to be exempt from state taxation, and if each state where 
income is earned is to be allowed to levy on that income irrespective 
of the domicil or legal character of the recipient, it is artificial to 
insist that either the manufacture or the securing of a customer is 
a mere "incident" or that either is "controlling," if controlling 
means of exclusive importance. Judge Siebecker's insistence that 
the extra-Wisconsin activities of the United States Glue Company 
were not entitled to legal consideration would have been more com- 
pelling if it had been based on the power of Wisconsin over its 
own corporate creatures. This ground, however, was not open to 
him under the Wisconsin statute. It does not appear to have been 
urged before the Supreme Court that the interpretation put upon 
the statute as to "situs" of the income in question raised an issue 
under the commerce clause. The Supreme Court might refuse to 
consider such a question in a case where state power over the re- 
cipient of income furnished sufficient justification for the result 
sanctioned by the state court. But it may be expected that other 
disputes will bring before the Supreme Court some important con- 
stitutional issues over the situs of income. 

Another phase of this same problem appears in Shaffer v. 
Howard, 98 decided by the federal district court for the Eastern 
District of Oklahoma. The case involved the application of the 
Oklahoma income tax to the income of non-residents. Mr. Shaffer 
was domiciled in Chicago and owned and operated oil wells in 
Oklahoma. He contended that none of the income from these 
wells was taxable by Oklahoma, because the state had no power 
over him personally, and the income was "made up from two in- 
separable elements — the property and the owner's management 
and intelligence — and the latter of these is outside the state." 99 
To this, Judge Cotteral answered: 

98 250 Fed. 873 (1918). 

99 250 Fed. 873, 874 (1918). 



664 HARVARD LAW REVIEW 

"The element of personal ability or services in acquiring the income 
may be disregarded. It enters into all income and causes the returns 
from an occupation. But it has not been deemed important in the taxa- 
tion of property, and need not be deducted from an assessment." 10 ° 

Judge Stone considered the contention more at length. He con- 
cedes arguendo the contention of the complainant that "it is the 
recipient of the income that is taxed, not his property," 101 and 
answers it by saying : 

"It does not necessarily follow from this definition that the plaintiff 
is subject to income tax only in the state of his residence. It means, 
rather, that he is subject to income taxation only in those jurisdictions 
which protect him in the production, creation, receipt, and enjoyment 
of his income. If he lives in Illinois, and has in Oklahoma the property 
or the business from which his income flows, does not the latter state 
truly protect him in the privilege of producing, creating, receiving, and 
enjoying that income when it permits and protects his business from 
which the income flows? How is that affected by his residence? " 102 



100 250 Fed. 883 (1918). 

101 250 Yed. 873, 875 (1918). This statement of the complainant's contention is 
taken from a quotation in his brief from State ex rel. SaUie F. Moon Co. v. Wisconsin 
Tax Commission, 166 Wis. 287, 163 N. W. 639 (1917). Judge Campbell, in his dis- 
senting opinion in Shaffer v. Howard, relies on this statement of the Wisconsin court 
and on another from the same tribunal in Manitowoc Gas Co. v. Wisconsin Tax 
Commission, 161 Wis. in, 152 N. W. 848 (1915). 

The Moon case held that income received by a resident stockholder after the 
effective date of the income tax law was taxable, although its economic source was a 
surplus in the hands of the corporation prior to that date. 

The Manitowoc Gas case held that interest due a non-resident on bonds issued by 
a domestic corporation was not income "derived from sources within this state" 
within the meaning of the Wisconsin statute, since "the law levying an income tax 
upon nonresidents 'upon such income as is derived from sources within the state or 
within its jurisdiction' must be construed to mean such income as issues directly 
from property or business located within the state, and not income from loans made 
therein, though, as here, secured by a trust deed upon property situated within the 
state" (161 Wis. in, 115). The inapplicability of the analysis of the Wisconsin tax 
in this opinion to the problem involved in Shaffer v. Howard is evident from an earlier 
statement of the Wisconsin court in the same case, which reads as follows: "If an 
income be taxed, the recipient thereof must have a domicile within the state or the 
property or business out of which the income issues must be situated within the 
state so that the income may be said to have a situs therein" (161 Wis. in, 114-15). 
This deprives the contention of Mr. Shaffer against the Oklahoma tax of any support 
from the Wisconsin court's interpretation of the basis of the Wisconsin tax. That 
tax was partly on persons, and partly on income, irrespective of the recipient. 

102 250 Fed. 873, 875-76 (1918). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 665 

In further elaboration of the problem of bi-state income, the 
learned judge continues : 

"Both the property in Oklahoma and the intelligence in Illinois con- 
tributed to this income. Each was necessary to the result. Each had 
protection from the state in which it was. It is impossible to separate 
the two elements for taxation purposes. It is impossible, if material, to 
determine which was most potent in the result. Can either state be 
told it cannot be compensated for its protection of a necessary com- 
ponent element of this income, or that it cannot measure such compensa- 
tion by that income? If, through accident or design, an individual 
dwells in one state, while his business is in part or wholly located in 
other states, so that he needs, commands, and receives the protection 
of several states, can his income therefrom escape imposition? It may 
be true that the state which protects the person of the one who creates, 
receives or enjoys an income may require of him therefor a tax measured 
by his ability to pay from his entire income. That is no reason why the 
state which protects the business which contributes to his income may 
not also demand, as pay for that protection, a tax measured by that 
part of his income which came from that business. If in the one case 
the state of residence can tax the right to create, receive, and enjoy an 
income, why cannot another state tax his right to create and receive an 
income from business within its borders?" 103 

This seems to be said by way of answer to the complainant's 
argument rather than as the analysis put upon an income tax by 
the writer of the opinion. For Judge Stone follows it with the 
paragraph : 

"A tax upon an income of the instant character (from a business) is 
directed at neither the person who receives nor the property from which 
the income arises, but at the privilege of making, producing, creating, 
receiving, and enjoying the income itself. The right to lay such tax 
depends upon the protection of the person who receives or of the busi- 
ness which helps create that income." 104 

Here seems to be a dual conception of an income tax, though the 
writer insists that even upon the complainant's conception that 
the tax is on the recipient, there is jurisdiction over an absent re- 
cipient based on the protection of interests of the recipient even if 
these interests be not those of his body or his castle. It is pointed 
out that the statute does not seek to create a personal liability 



103 250 Fed. 876 (1918). 1M Ibid. 



666 HARVARD LAW REVIEW 

against non-residents for the payment of the tax, but confines it- 
self to creating a lien on the sources of the income taxed. But, to 
Judge Stone, direct power of compulsion over the person is not a 
prerequisite to the levy of a personal tax, provided other essentials 
are present. On this point he says : 

"There is nothing new in this conception of a nonresident being taxed 
for rights or privileges he exercises under the protection of another 
state. Inheritance taxes are illustrations. Mager v. Grima, 8 How. 
490, 12 L. Ed. 1 1 68; Scholey v. Rew, 23 Wall. 331, 23 L. Ed. 99. Such 
a tax is levied against the nonresident as well as the resident because of 
his inheritance — the state protects him in that privilege. Occupation 
or business taxes are also illustrative. And this would be so because 
the state of Oklahoma permits him to carry on his business within the 
state, and protects him therein, irrespective of whether he lives within 
or without the state, or manages the business from within or without 
the state. When he can be properly taxed for the privilege of inheriting 
the property or carrying on a business within another state, why can- 
not he be taxed upon an income he derives from business within the 
state, when a tax upon such an income as this is a levy on the privilege 
of producing, creating, receiving and enjoying an income? It is true 
the tax on the income is not upon the business conducted, but it is also 
true that the income springs therefrom, and, following the situs thereof, 
as the child takes legally the residence of the parent, it carries the right 
of taxation with it." 105 

This says that a person is something more than a physical cor- 
pus. From the standpoint of legal relations, a person is the focus 
of many interests, and the person is pro tanto where any one of his 
interests is. It is with relations that the law has to deal, and the 
relations of a person may radiate to portions of the globe which 
his body never visits. Such a notion may be criticized as meta- 
physical, but it is not on that account an anomaly in the law. 
And, though metaphysical, it may well contain more of substantial 
realism than a view which sees in a person nothing but what is 
encased in a suit of clothes. Judge Stone does not rest with this 
justification for the assessment of income taxes on nonresidents. 
He uses it to meet Mr. Shaffer on his own ground, and then ad- 
vances to another position. His analysis of the considerations 
that should control the legal concept of situs is well worth quoting: 

106 250 Fed. 876-77 (1918). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 667 

"Such an income of a nonresident is taxable not only because it fits 
in with the theory of the right of all taxation, i. e., protection, but for 
another reason. The situs of things and choses in action and legal 
rights rests in many cases upon a legal fiction. The necessity of avoid- 
ing confusion, inconvenience or injustice arises in some instance, and 
the law settles upon a so-called situs. Familiar illustrations are: A 
married woman ordinarily partakes of her husband's nationality and 
domicile; the law of domicile controls the descent of personalty; and 
many others to be found in the realm of private international law. 
These questions arise where there are conflicting claims of jurisdiction. 
Their settlement depends often, if not usually, upon broad considera- 
tions of public policy and justice. One main test in determining the 
public policy and justice of a situation is to examine the possible or 
probable effect of a particular holding. If the above view of this tax 
taken by the court does not prevail, there will result the possibility of 
avoidance of state income taxes. This latter through the possibility of 
taking up residence in a state with little or no taxation of that sort. 
Income taxation is too valuable and important a method of exercising 
the sovereign power of taxation to risk any diminution through a choice 
of residence at the hands of the party taxed who at the same time 
maintains his property and business as before. The public good re- 
quires its preservation in its entirety." 106 

There can be little doubt that one or the other or both of these 
views of Judge Stone will prevail to the extent of furnishing suf- 
ficient justification for state taxation of income from business within 
its borders, irrespective of the domicil or character of the ultimate 
recipient of that income. 107 It is most unlikely that any non- 

106 250 Fed. 877 (1918). 

107 This prophecy is ventured, notwithstanding the dissent of Judge Campbell in 
Shaffer v. Howard. Judge Campbell relies on the following statement of Mr. Justice 
Field in State Tax on Foreign-Held Bonds, 15 Wall. (82 U. S.) 300, 319 (1872): 

"The power of taxation, however vast in its character and searching in its extent, 
is necessarily limited to subjects within the jurisdiction of the State. These subjects 
are persons, property, and business. Whatever form taxation may assume, whether 
as duties, imposts, excises, or licenses, it must relate to one of these subjects. It is 
not possible to conceive of any other, though as applied to them, the taxation may be 
exercised in a great variety of ways." 

On this as a premise, Judge Campbell insists that the Oklahoma income tax on 
residents is a tax on persons, and the tax on non-residents is either on persons, 
property or business. As a personal tax it cannot be sustained because there is no 
jurisdiction over the person of non-residents. As a tax on business or on property, 
it cannot be sustained because it selects for discrimination the property or the busi- 
ness of non-residents and thereby denies them the equal protection of the laws and 
the privileges and immunities of citizens of the several states. ' 



668 HARVARD LAW REVIEW 

resident will be given any deduction for the contribution of his in- 
telligence to the creation of the income taxed. His intelligence is 
a factor only as it is applied, and it is applied where the business 
operations take place. Yet there still remains the inquiry whether 
extra-state operations should not, whenever feasible, be given 
weight in determining what portion of the result of bi-state activi- 

The weakness of the argument here is in the assertion that for the purpose of de- 
termining the validity of a tax on the property or business of nonresidents, "it must 
be considered as standing alone" (250 Fed. 873, 889). This is to say that it cannot 
be considered that residents are also taxed on their property and business within the 
state, when they are taxed on their income from that property and business and on 
other income besides. The argument is a flagrant example of the evil of reliance on 
differences in nomenclature to the disregard of similarity of substance. 

Whether a state should tax nonresidents on other income than that from business 
within its borders is open to doubt. The economic values behind income from ren- 
tals, from interest on bonds and from dividends on stock are within the state and are 
taxable by the state through appropriate methods. As to land within the borders 
there has never been any question. As to bonds secured by property within the 
state, State Tax on Foreign-Held Bonds, supra, on which Judge Campbell relied, 
must be regarded as modified by Savings & Loan Society v. Multnomah County, 
note 109, infra, to the extent of permitting a state to declare that such bonds are an 
interest in the property by which they are secured and taxable as such an interest. 
So the stock of domestic corporations owned by nonresidents may be taxed. Corry 
v. Baltimore, 196 U. S. 466, 25 Sup. Ct. Rep. 297 (1905). On the other hand ordi- 
nary debts due from residents to nonresidents are not taxable except when there are 
special circumstances, as in Metropolitan Life Insurance Co. v. New Orleans, 205 
U. S. 395, 27 Sup. Ct. Rep. 499 (1907), and cases therein cited. 

In so far as a state tax on income is in lieu of actual or possible taxes on the 
sources of such income, there would seem to be no constitutional objection to a tax 
on income derived by nonresidents from such sources. When, however, such a tax 
on the income of nonresidents is in addition to taxes on the sources of such income, 
or is on income from non-taxable sources, a different question is presented. The 
Manitowoc Gas case, note 101, supra, shows the disinclination of the Wisconsin 
court to permit the taxation of income due nonresidents from bonds issued by a 
domestic corporation. The decision professes to be based on an interpretation of the 
statute, but the construction is strained, and the decision is plainly influenced by a 
notion that an interpretation permitting such taxation would make the statute un- 
constitutional. There can be little dispute that a state ought not to tax nonresi- 
dents on both the income and the sources of income or on income from non-taxable 
sources, with the possible exception of the case where the combined tax on the source 
and on the income is not greater than customary taxation on the source alone. 
Whether the considerations which should induce self-restraint on the part of the 
state are sufficiently compelling to warrant coercion on the part of the Supreme 
Court is more debatable, but in view of the fact that all income is likely to be held 
taxable to an owner at his domicil, there seems good reason to insist that other states 
from which such income is derived should be restrained from adding more than one 
additional tax. We cannot hope to avoid double taxation by the action of different 
states, but so far as practicable the line should be drawn at this point. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 669 

ties should be allocated to each of the two states. It does not 
seem wholly equitable that, when goods are manufactured in one 
state and sold in another, the state of origin should receive all the 
benefit and the state of destination none. Once it is recognized 
that net income from interstate commerce is a proper subject of 
state taxation, lawmakers should strive to devise some method of 
apportionment whereby income that is earned partly in one state 
and partly in another shall be fairly divided between the two. 108 
Those who enjoy a market place other than the state of their 
domicil or of their manufacturing may reasonably be required to 
contribute to the governmental expenses of that market place, for 
some of those expenses are likely to redound to their benefit. 

These considerations are doubtless more pertinent for legislators 
than for courts. Neither the Fourteenth Amendment nor the com- 
merce clause prescribes a perfect system of taxation. No such 
system has thus far been evolved by the ingenuity of man. The 
courts can at best forbid only the most obvious inequities. What- 
ever rules of the apportionment of bi-state income may ultimately 
be sanctioned by the Supreme Court will operate in some particu- 
lars to the advantage of the state which suffers from their other 
effects. Each state is a state of origin of goods sold to its neigh- 
bors and a state of consumption of goods made by its neighbors. 
If Illinois is not allowed to get any of the proceeds of goods sold 
to her citizens from a factory in Wisconsin, she will be recompensed 
by not having to make deductions from the proceeds of goods sent 
from her factories to dwellers in Wisconsin. We can hardly look 
forward to an era when double taxation shall cease to be. The 
same hydra-headed conceptions which have permitted the eco- 
nomic value represented by intangibles to be reached by one state 
on one theory and by another state on another theory 109 will be 
likely to produce the same results in the taxation of income. The 
most we can aim for is the most satisfactory compromise and ad- 
justment possible in a mundane world peopled and managed by 
finite individuals. 

108 The various types of unit rule will tend to make such an apportionment when 
the business in the several states is manufacture and sales and each state in which 
business is done is a market place for goods from other states and a place of origin 
for goods sent to other states. 

109 Compare Kirtland v. Hotchkiss, note 77, supra, with Savings & Loan Society v. 
Multnomah County, 169 U. S. 421, 18 Sup. Ct. Rep. 392 (1898). 



670 HARVARD LAW REVIEW 

An important step in this adjustment has been taken by a com- 
mittee of the National Tax Association, of which Professor Bullock 
of Harvard University is chairman. This committee has drafted a 
plan of a model system of state and local taxation no which, if 
adopted by all the states, would go far towards remedying many 
of the evils now incident to the haphazard and contradictory tax 
systems of the sister states. The recommendations concern us 
here only in so far as they apply to income taxation. In brief the 
proposal is to divide income taxation sharply into a personal in- 
come tax and a business tax. In the taxation of personal incomes, 
the source of the income is to be neglected except when the federal 
Constitution forbids, as it probably still does in the case of income 
from the national government. 111 In addition to the personal income 
tax, there shall be a business tax on the net income derived from 
business carried on within the jurisdiction. Extra-state income will 
thus be taxed only to the ultimate human recipient at his domicil. 
Business income, as such, will be taxed only where the income is 
earned. The business tax is to be in lieu of the various other de- 
mands now made on corporations by way of excises, franchise taxes 
and the like. For special reasons some other method of fixing the 
amount of the business tax may be substituted for the reference to 
the net income. 

These proposals, it is evident, will not do away with double tax- 
ation ; but they will greatly minimize its inequities and other evils. 
There must continue to be two conceptions underlying an income 
tax: the earning of the income, and the enjoyment of the fruits 
thereof; the business, and the person. These two conceptions must 
be driven together in harness and under harmonious, if not uni- 
fied, control. Only by securing the adoption of substantially simi- 
lar plans by all the states to which the business of the nation pene- 
trates can we avoid the complexities and diversities which now 
beset us. The Supreme Court can only fix the outside limits of 
decency. Within those limits there is need for all the intelligence 
that the states can muster to substitute a reasonable degree of 

uo Pamphlet issued by National Tax Association, 195 Broadway, New York City. 
The pamphlet will be contained in the Proceedings of the Association for 1918. 

111 In the next and concluding instalment of this series, consideration will be given 
to the inferences to be drawn from the opinion of Mr. Justice Pitney in the Oak 
Creek case, note 2, supra, as to the possibility of an abandonment of the doctrine that 
a state income tax cannot include the income from the federal government. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 671 

harmony for the chaos that is now characteristic of the aggregate 
of the fiscal systems of the several states. 

III. Taxes Not Measured by Income 

In his dissenting opinion in Western Union Telegraph Co. v. 
Kansas, 112 Mr. Justice Holmes remarked: 

"If after this decision, the State of Kansas, without giving any reason, 
sees fit simply to prohibit the Western Union Telegraph Company from 
doing any more local business there or from doing local business until it 
has paid $20,100, I shall be curious to see upon what ground that legis- 
lation will be assailed." 113 

This curiosity cannot be said to have been completely satisfied by 
any of the decisions rendered thus far. In no case has a specific 
tax on local business been held to be a regulation of interstate com- 
merce or a denial of due process of law. Yet, on the whole, the 
cases appear to negative the existence of an unlimited power to 
impose specific taxes on the local business of a concern that is also 
engaged in interstate commerce. 

There are, indeed, intimations to the contrary in the decisions 
prior to the Western Union case. In Postal Telegraph Cable Co. v. 
Charleston, 114 " which sustained a municipal tax of $500 on the local 
business of a telegraph company, Mr. Justice Shiras declared: 

"If business done wholly within a State is within the taxing power of 
the State, the courts of the United States cannot review or correct the 
action of the State in the exercise of that power." U5 

In Osborne v. Florida, 11 * which sanctioned a state statute im- 
posing occupation taxes graded according to the number of in- 
habitants in the cities and towns in which the occupation was 
carried on, which statute the state court had construed as appli- 
cable only to local business, Mr. Justice Peckham observed: 

"So long as the regulation as to the license or taxation does not refer 
to and is not imposed upon the business of the company which is inter- 
state, there is no interference with that commerce by the state statute." 117 

112 216 U. S. 1, 30 Sup. Ct. Rep. 190 (1910). 

113 Ibid., 54-55- 

114 153 U. S. 692, 14 Sup. Ct. Rep. 1094 (1894). 

115 Ibid., 699-700. 

116 164 U. S. 650, 17 Sup". Ct. Rep. 214 (1897). 
u7 Ibid., 655. ' 



672 HARVARD LAW REVIEW 

Pullman Co. v. Adams 11S and Allen v. Pullman's Palace Car 
Co. 119 have already been reviewed in the section dealing with taxes 
on privileges. 120 The judges here appeared to be of the opinion 
that no tax on the local business could be a burden on the interstate 
business so long as the company was free to abandon the local 
business. These two cases were strongly relied on by the dissent 
in the Western Union case. Mr. Justice Harlan distinguished 
them on the ground that they involved no device to reach inter- 
state commerce or property beyond the state in the guise of a tax 
on local business, 121 thereby implying that such a device would 
henceforth receive the disapprobation of the court. 

Two other cases prior to the Western Union case call for con- 
sideration. Kehrer v. Stewart 122 approved of a state statute "which 
provided that there should be assessed and collected 'upon all 
agents of packing houses doing business in this State, two hundred 
dollars in each county where said business is carried on.'" 123 The 
State court had construed the statute to be applicable only to local 
business. It was conceded that most of the business was interstate 
in character, though the exact proportion of each was not shown. 
In Osborne v. Florida, 12 * ninety-five percent of the business was 
interstate. This fact is referred to by Mr. Justice Brown in the 
Kehrer case and declared to be immaterial. The attitude of the 
court on the general question is expressed as follows: 

"If the amount of the domestic business were purely nominal, as, for 
instance, if the consignee of a shipment made in Chicago upon an order 
filled there, refused the goods shipped, and the only way of disposing of 
them was by sales at Atlanta, this might be held to be strictly incidental 
to an interstate business, and in reality a part of it, as we held in Crutcher 
v. Kentucky, 141 U. S. 47; but if the agent carried on a definite, though a 
minor, part of his business in the State by sales of meat there, he would 
not escape the payment of the tax, since the greater or less magnitude 
of the business cuts no figure in the imposition of the tax. There could 
be no doubt whatever that, if the agent carried on his interstate and 
domestic business in two distinct establishments, one would be subject 

118 189 U. S. 420, 23 Sup. Ct. Rep. 494 (1903). 

119 191 U. S. 171, 24 Sup. Ct. Rep. 39 (1903). 

120 31 Harv. L. Rev. 582-83. See also 32 Harv. L. Rev. 405-06. 
m 31 Harv. L. Rev. 592-93. 

m 197 U. S. 60, 25 Sup. Ct. Rep. 403 (1905). 

123 Ibid., 61. 

m Note 116, supra. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 673 

and the other would not be subject to the tax, and in our view it makes 
no difference that the two branches of the business are carried on in the 
same establishment. The burden of proof was clearly upon the plaintiff 
to show that the domestic business was a mere incident to the interstate 
business." 125 

Later, in dismissing objections urged under the equal-protection 
clause, Mr. Justice Brown declared: 

"What the necessity is for such a tax, and upon what occupations it 
shall be imposed, as well as the amount of the imposition, are exclusively 
within the control of the State legislature. So long as there is no dis- 
crimination against citizens of other States, the amount and necessity 
of the tax are not open to criticism here." m 

The Kehrer case was followed in Armour Packing Co. v. Lacy, 127 
in which the tax was $100 in each county and the fact appeared 
that the company did a large local business. 

These cases undoubtedly justify the curiosity betrayed by Mr. 
Justice Holmes in his Western Union dissent. The opportunity to 
satisfy that curiosity was presented to the Supreme Court in Wil- 
liams v. Talladega, l2S but it was not grasped. A city ordinance 
imposing a tax of $100 was held void because it fell indiscriminately 
on all intra-state business including that done for the federal gov- 
ernment. With respect to the contention material to our present 
purpose, Mr. Justice Day declared: 

" It is further contended that the tax is unreasonable and unjust because 
of its effect upon interstate business. The reasonableness of the ordi- 
nance, unless some Federal right set up and claimed is violated, is a 
matter for the State to determine. It is contended that the result of the 
tax upon the intra-state business conducted at a loss is to impose a bur- 
den upon the other business of the company, and is therefore void. The 
Supreme Court of Alabama, however, reached the conclusion that the 
attempted test for eleven months, showing a loss of eighty-six cents, is 
not a sufficiently accurate representation of the business of the company 
conducted at Talladega to render the tax void. With this view we agree, 
and we are not satisfied that the tax is such as to impose a burden upon 
interstate commerce, and therefore make it subject to attack as a denial 
of Federal right." 129 

125 197 U. S. 60, 69, 25 Sup. Ct. Rep. 403 (1905). 
m Ibid., 70. 

127 200 U. S. 226, 26 Sup. Ct. Rep. 232 (1906). 

128 226 U. S. 404, 33 Sup. Ct. Rep. 116 (1912). 

129 Ibid., 416-17. 



674 HARVARD LAW REVIEW 

Here is the possible implication that a tax on local business may 
be so large or so disproportionate to the business taxed as to be 
regarded as a device for reaching the interstate business. At 
any rate, the court had a chance to declare that the tax could 
not be a regulation of interstate commerce, whatever the facts 
might be as to the profitability of local business. By failing to do 
so, it invites other complainants to try again if they have a stronger 
case to support their claim. A similar invitation was extended in 
Ohio Tax Cases 13 ° considered in the preceding instalment of this 
discussion. 131 

The case which gives sufficient warrant for the belief that there 
is a limit to the power of the state to impose specific taxes on local 
business, when that business is united with an interstate business, 
is General Railway Signal Co. v. Virginia 132 decided in April a year 
ago. This case involved a writ of error from the Virginia decision 
considered in a previous section of this study. 133 The prophecy 
was there ventured that the Virginia decision would be reversed 
by the Supreme Court. This prophecy was founded on the assump- 
tion that the Virginia excise on foreign corporations was measured 
by total capital stock with no maximum limitation, since nothing 
to the contrary appeared in the opinion of the Virginia court. 
The assumption, however, was contrary to fact, as corporations 
having a capital of $90,000,000 or more paid only $5,000. More- 
over, the amounts exacted of smaller corporations did not vary 
precisely with capital stock, except when the capital was between 
$50,000 and $1,000,000. One thousand dollars was demanded 
from every corporation with a capital between one and ten million 
dollars, $1,250 from those whose capital is between ten and twenty 
million, with corresponding increases of $250 for those in the higher 
classes. Thus the statute was like the hypothetical one suggested 
previously in this study, 134 in which, instead of a single maximum, 
there was a series of maxima graded roughly according to capital 
stock. In discussing such a statute, it was argued that if Massa- 
chusetts made its exaction proper by a $2,000 maximum which was 
of value only to corporations with a capital in excess of $10,000,000, 

130 232 xj § 5y6 j 24 Sup. Ct. Rep. 372 (1914). 

131 32 Harv. L. Rev. 405-07. 

132 246 U. S. 500, 38 Sup. Ct. Rep. 360 (1018). 

133 General Railway Signal Co. v. Commonwealth, 118 Va. 301, 87 S. E. 598 (1916), 
31 Harv. L. Rev. 756-60. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 675 

it would not transgress by adding lower maxima for smaller corpora- 
tions. 135 A statute with a maximum, it was urged, should be re- 
garded as one imposing a specific tax, with a sliding discount in 
favor of corporations whose moderate capitalization entitled them 
to it. 136 

This is in substance the Virginia statute. It imposes a specific 
$5,000 fee and allows corporations having less than $90,000,000 
a deduction measured not precisely, but roughly, according to the 
amount by which their capital is less than $90,000,000. Mr. Jus- 
tice McReynolds appears to conceive it important that Virginia 
put the corporations into ten-million-dollar groups and did not 
vary the tax directly according to the capital, but it is hard to see 
how this is significant where there are fixed maxima. Moreover 
this does not describe the method of measuring the tax on corpora- 
tions whose capital was between $50,000 and $1,000,000. The 
statute could hardly have been "more palatable if all such corpora- 
tions were charged the same amount, instead of a percentage of 
their actual capital. What is important is that there shall be a fair 
limit to any tax that may be imposed. It is apparent that the 
maximum or maxima must be reasonable, or the situation comes 
within the Western Union case rather than the Baltic Mining case. 

Such is clearly the position taken by the court in General Railway 
Signal Co. v. Virginia. 137 The approval of the Virginia decision 
was accorded gingerly, Mr. Justice McReynolds saying: 

"Inspection of the statute shows that prescribed fees do not vary in 
direct proportion to capital stock, and that a maximum is fixed. In the 
class to which plaintiff in error belongs the amount specified is one thou- 
sand dollars and, under all the circumstances, we cannot say that this is 
wholly arbitrary or unreasonable. 

" Considering what we said in Baltic Mining Co. v. Massachusetts, 231 
U. S. 68; St. Louis Southwestern Ry. Co. v. Arkansas, 235 U. S. 350; 
Kansas City, Ft. Scott &° Memphis Ry. Co. v. Botkin, 240 U. S. 227; 
Kansas City, Memphis & Birmingham R. R. Co. v. Stiles, 242 U. S. in, 
the two characteristics of the statute just referred to must be regarded 
as sufficient to save its validity. It seems proper, however, to add that 
the case is on the border line. See Looney v. Crane Co., 245 U. S. 178; 

134 31 Harv. L. Rev. 738-39. 
136 Ibid. 

136 31 Harv. L. Rev. 777, 941-42. 

137 Note 132, supra. 



676 HARVARD LAW REVIEW 

International Paper Co. v. Massachusetts, 246 U. S. 135, and Locomobile 
Co. v. Massachusetts, 246 U. S. 146." 138 

Among the circumstances thus taken into consideration and 
previously detailed in the opinion was the fact that the company's 
contracts in Virginia called for a total consideration in excess of 
$200,000. The caution that the case is on the border line and the 
mild approval of the tax as not wholly arbitrary or unreasonable 
show clearly that a maximum limit or series of limits to an excise 
measured or roughly graded in accordance with capital stock does 
not save the statute from sin unless the maximum is reasonable. 
Curiosity may still be piqued to discover what will be the test or 
tests of reasonableness, but we may now be satisfied that a flat 
charge on the local business of a company that also conducts inter- 
state business is not immune from condemnation as a regulation of 
interstate commerce and a denial of due process of law. If this is 
true of an excise on the local business of a foreign corporation, it 
must also be true of specific taxes on acts or occupations, where we 
are relieved from any intrusion of the notion of an arbitrary power 
over the doings of a corporate entity. 

There remains for consideration only the question of the proper 
test of reasonableness. St. Louis, Southwestern R. Co. v. Arkansas 139 
declares that the basis of an excise on a foreign corporation engaged 
in combined local and interstate commerce may be that proportion 
of the total capital stock which represents the value of the property 
within the taxing district, though such property is used in inter- 
state as well as local commerce. This excise measured by the 
property within the state was in addition to an ordinary property 
tax, but it appeared that the right to do business as a corporation 
was not included in the assessment of that ordinary property tax. 
Mr. Justice Pitney's opinion is flavored with the notion that this 
excise and the so-called ordinary property tax together did no 
more than to assess the total property at its value as a going con- 
cern, but it is not definitely stated that the propriety of measuring 
an excise on local business by the total property in the state is 
conditioned on the mode by which that property is assessed for 
ordinary taxation. It seems reasonable to assume that, in the 



246 U. S. 500, 511, 38 Sup. Ct. Rep. 360 (191* 
235 U. S. 350, 35 Sup. Ct. Rep. 99 (1914)- 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 677 

absence of special circumstances, an excise or occupation tax on a 
local business may be based on all the property used in that business 
even though that property is also used in interstate business and is 
also subjected to an ad valorem property tax. 140 But it may readily 
be conceived that special circumstances may make such a measure 
of an excise or occupation tax a very real burden on interstate 
commerce. It is apparent that when such taxes are imposed on 
specially selected enterprises, they may in fact constitute serious 
discriminations against interstate commerce. All the property 
may be used for local as well as interstate commerce and yet the 
latter constitute by far the greater part of the total business. If a 
state is allowed free range in prescribing the rate of levy on such 
a property base, it may do quite as serious an injury to interstate 
commerce as it could inflict by basing the tax on total capital stock. 
Though the court may as a general rule accept property employed 
in local business as the proper measure of an occupation tax on that 
business, it must always have at hand its doctrine that every case 
depends on its own circumstances and must be ready to find the 
special circumstances that take the case out of the general rule. 

It must be impossible to lay down any general rule as to what is 
a proper amount to impose as a specific tax on a local business that 
is combined with an interstate business. All that can be said is 
that by and large the punishment must fit the crime. One thousand 
dollars may not have been too much for Virginia to demand of the 
Railway Signal Company in view of its contracts within the state. 
Yet the same sum based on the same capital stock might prevent 
it from bidding on small contracts within the state. Where the 
performance of the contract calls for interstate as well as local 
enterprise, a fee out of all proportion to the consideration for the 
contract may stand as an absolute bar to the particular interstate 
commerce. This is the vice of all occupation or business taxes that 
are not measured by the value of what is being taxed. The vice is 
particularly noxious in the case of corporations not regularly en- 
gaged in business within the state, but which merely enter to do 
occasional jobs. The vice does not seem to have manifested itself 

140 In Amos v. Postal Telegraph-Cable Co. (Fla.), 80 So. 293 (1018), the supreme 
court of Florida held that a state license fee or occupational tax measured by property 
within the state should exclude from the computation property employed exclusively 
in interstate commerce. The opinion reg?„rded the construction as necessary to save 
the tax from being an unconstitutional regulation of interstate commerce. 



678 HARVARD LAW REVIEW 

in any of the cases of specific taxes that have come before the court, 
including the excises of Massachusetts and Virginia on foreign 
corporations. But there is no telling what concerns have been 
prevented by those taxes from coming in to take small, isolated 
contracts. Now that the states are assured that they may tax the 
income from all business done within the state, whether that busi- 
ness is local commerce or interstate commerce, there is no further 
excuse for any form of specific taxes for a general fiscal purpose. 

Through an income tax, the state may tax interstate as well as 
local commerce. This bears on the question of the reasonableness 
of specific taxes so long as the states choose to continue them. All 
that is subject to such a tax in strict legal theory is the local busi- 
ness. But we should not infer from this that the tax becomes an 
invalid regulation of interstate commerce as soon as it is dispro- 
portionate to the local business. The interstate commerce is tax- 
able, if the state goes about it in the right way. It may reach it by 
valuing property by a capitalization of earnings from its use, by 
imposing a gross-receipts tax in lieu of other taxes, and by levying 
a tax on net incomes. So also it should be allowed to reach it by 
specific taxes on local business, provided those taxes are not other- 
wise improper. The test of the reasonableness of any form of 
specific tax should be the relation of the amount demanded, not to 
the legal res which is formally the subject of taxation, but to the 
economic interest which in the light of all the decisions is actually 
liable for its proportional contribution to the state fisc. 

(To be concluded.) 

Thomas Reed Powell. 
Columbia University. 



902 HARVARD LAW REVIEW 



INDIRECT ENCROACHMENT ON FEDERAL 
AUTHORITY BY THE TAXING POWERS 
OF THE STATES 1 VIII 

III. Summary and Conclusion 

\ X 7"E are often told that a state cannot tax interstate commerce 
* * or an instrumentality of the federal government. This is 
commonly accepted legal doctrine. But in the law, as in human 
life elsewhere, actions speak louder than words. What judges 
actually permit and prohibit is more important than what they 
say about their approval and their disapproval. By their fruits 
ye shall know them better than by their professions. If judges do 
in fact permit the states to tax interstate commerce and the instru- 
mentalities of the federal government, that commerce and those 
instrumentalities may be taxed by the states, all doctrine to the 
contrary notwithstanding. 

It is perhaps too much to hope that all conflict between the for- 
mulations of legal doctrine and the substantial results of legal 
decisions will ever be resolved. Until all catch phrases which clothe 
half truths in the majesty of the universal and the absolute are 
banished from common speech, we cannot expect the imaginary 
deity which calls itself The Law to be free from the foibles of its 
mortal makers. But those who are interested in law, not as a 
conceptualist vision, but as an instrument for the actual ordering 
of human affairs, must necessarily seek to discover how the law 
does actually order human affairs. They will wish to make their 
own formulations of the law as it is laid down and applied by those 
duly vested with authority in the matter. They will be unwilling to 
accept the formulations of others that do not square with results of 
the adjudications. 

When in this frame of mind we approach the limitations im- 
posed upon the taxing powers of the states by the existence of 

1 For preceding instalments of this discussion, see 31 Harv. L. Rev. 321-72 
(January, 1918); Ibid., 572-618 (February, 1918); Ibid., 721-78 (March, 1918); Ibid., 
93 2- 53 (May, 1018); 32 Harv. L. Rev. 234-65 (January, 1919); Ibid., 374-416 (Febru- 
ary, 1919); and Ibid., 634-78 (April, 1919). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 903 

the federal system of government, we find the line of demarcation 
by no means so clear as familiar formulations would entice us to 
assume. We discover that in certain ways and to a certain extent 
a state may tax a federal instrumentality and may tax interstate 
commerce. We face the problem as one of methods and of degree. 
We see the solution reached by compromise and by practical ad- 
justment and not by simple discovery of a sharp boundary between 
two entirely separate spheres of power. We find that the law can- 
not be summed up in a phrase, but that we must go behind the 
phrases to the facts. 

To Chief Justice Marshall we are indebted for clarity and con- 
fusion on the problem of marking the limits of state power. The 
confusion appears when he professes clarity, and the clarity is 
manifest when he owns up to perplexity. By neglecting the con- 
crete and rising to the heights of political theorizing, Marshall attains 
an artificial simplicity which would banish all our difficulties, if 
words alone were adequate to the task. In McCulloch v. Maryland, 2 
he tells us: 

"If we measure the power of taxation residing in a State, by the extent 
of sovereignty which the people of a single State possess, and can confer 
on its government, we have an intelligible standard applicable to every 
case to which the power may be applied." 3 

Find the limits of state sovereignty, and all difficulties are at an end. 
Sovereignty is the intelligible standard applicable to every case. In 
praise of his solution, Marshall continues: 

"We have a principle which leaves the power of taxing the people and 
property of a State unimpaired; which leaves to a State the command of 
all its resources, and which places beyond its reach, all those powers which 
are conferred by the people of the United States on the government of the 
Union, and all those means which are given for the purpose of carrying 
those powers into execution. We have a principle which is safe for 
the States, and safe for the Union. We are relieved, as we ought to be, 
from clashing sovereignty; from interfering powers; from a repugnancy 
between a right in one government to pull down what there is an acknowl- 
edged right in another to build up; from the incompatibility of a right 
in one government to destroy what there is a right in another to pre- 
serve. We are not driven to the perplexing inquiry, so unfit for the 

2 4 Wheat. (U. S.) 316 (1819). 3 Ibid., 429-30. 



904 HARVARD LAW REVIEW 

judicial department, what degree of taxation is the legitimate use, and 
what degree may amount to the abuse of the power." 4 

If it were really so easy as Marshall here appears to think, the 
most merciful of critics could hardly condone the wanderings of his 
successors in the path which he pointed out. With the formula of 
McCulloch v. Maryland 5 before them, every dispute should have 
been speedily and unanimously resolved. But Marshall himself 
was soon to doubt the magic of his pronouncement of 1819. Eight 
years later in Brown v. Maryland 6 we find him aware that the 
notion of sovereignty is not the simple solvent that it had previously 
appeared to be. In 1827 he confesses: 

"The constitutional prohibition on the States to lay a duty on imports, 
a prohibition which a vast majority of them must feel an interest in pre- 
serving, may certainly come in conflict with their acknowledged power 
to tax persons and property within their territory. The power, and the 
restriction on it, though quite distinguishable when they do not approach 
each other, may yet, like the intervening colours between white and 
black, approach so nearly as to perplex the understanding, as colours 
perplex the vision in marking the distinction between them. Yet the 
distinction exists, and must be marked as the cases arise. Till they do 
arise, it might be premature to state any rule as being universal in its 
application." 7 

Here the great Chief Justice tells us that the line between state 
power and absence of power is not an easy one to mark. A state 
tax which from one angle is an exercise of lawful authority may from 
another angle be an encroachment on the field reserved to the 

4 4 Wheat. (U. S.) 43°- 
6 Note 2, supra. 

6 12 Wheat. (U. S.) 419 (1827). 

7 Ibid., 441. Compare Chief Justice Taney in License Cases, 5 How. (U. S.) 504, 
574 (1847): "It is unquestionably no easy task to mark by a certain and definite line 
the division between foreign and domestic commerce, and to fix the precise point, in 
relation to every imported article, where the paramount power of Congress terminates, 
and that of the State begins. They cannot be determined by the laws of Congress or of 
the States, as neither can by its own legislation enlarge its own powers, or restrict 
those of the other. And as the Constitution itself does not draw the line, the question 
is necessarily one for judicial decision, and depending altogether upon the words of the 
Constitution." That the words of the Constitution have to be supplemented by some- 
thing extraneous is hinted by the previous recognition that the Constitution itself does 
not draw the fine. How little the words of the Constitution have to do with the prob- 
lem must be apparent to everyone who has read the judicial opinions which have 
struggled with its solution. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 905 

nation. Taxes which fall in some degree on instrumentalities of 
the national government or on the fruits of interstate commerce 
have a double aspect. They are imposed on persons or property or 
occupations or privileges within the geographical jurisdiction of a 
state and normally within its legal jurisdiction. They also have 
some effect on operations within the legal jurisdiction of the United 
States — a legal jurisdiction assumed to be exclusive. One or the 
other aspect must be legally predominant, since the same tax can- 
not be both valid and invalid. But the necessary legal predominance 
of one aspect cannot obliterate the existence of the other; and the 
recognized imperative of cleaving only to one does not carry with 
it any certain indication of the choice between the two. The choice 
must be made as the cases arise, and without the aid of any rule 
of universal application. The rule must be the child and not the 
parent of the cases. 

All of the taxes which the Supreme Court has had to consider, 
from Marshall's day to this, have been demands which it was possi- 
ble to regard as formally on subjects within the jurisdiction of the 
state. All have had some effect on interstate commerce or on some 
operation of the national government. On nearly every crucial 
question the judges have been in disagreement as to whether the 
form or the effect should be regarded as controlling. In most im- 
portant instances this disagreement can be traced to differences of 
opinion as to the effect to be anticipated from the exercise of state 
power in question. It may be said, therefore, that the accepted 
test has always been a judgment on a question of economics, pro- 
vided it is understood that the judges have been concerned with 
the economic effect, not of the precise tax before them, but of such 
a tax levied at the highest rate which a state might be moved to 
impose. It will not do to accept without qualifications Marshall's 
statement that "questions of power do not depend on the degree 
to which it may be exercised," 8 but in general it is true that the 
court has not forgiven any state tax because the particular rate 
of levy was so moderate that its effect on national instrumentalities 
or on interstate commerce was negligible. 

The disagreement among the judges which has been character- 
istic of most of the decisions was not present in McCulloch v. Mary- 
land. 9 Here the court was unanimous in holding that a Maryland 

8 Brown v. Maryland, 12 Wheat. (U. S.) 419, 439 (1819). 9 Note 2, supra. 



906 HARVARD LAW REVIEW 

stamp tax on notes issued by the United States bank was a tax on an 
instrumentality of the national government. The tax was discrim- 
inatory, in that it applied only to banks not chartered by Maryland; 
but the court did not notice this point, and Marshall's opinion is 
applicable to a nondiscriminatory tax as well. On the other hand 
the Chief Justice conceded that Maryland might tax the real estate 
of the bank and the interest of Maryland citizens in the institution 
"in common with other property of the same description throughout 
the State." 10 A tax on the issuance of notes was regarded as a tax 
on the operations of a federal instrumentality; a tax on the real 
estate was thought to be something else. The only difference be- 
tween the two appears to be one of degree. One affects or may 
affect the operations of the bank more seriously than the other. 

Brown v. Maryland u also dealt with a discriminatory tax, and 
again this was not noted by the court. The law declared invalid 
required a license of importers of foreign articles and others selling 
the same by wholesale as a pre-requisite of authority to dispose of 
them. Retailers of foreign commodities were subject to a companion 
law. Mr. Justice Thompson dissented. He assumed that retailers 
would be held taxable and declared that there was no difference 
in effect between a tax on the wholesaler and one on the retailer. 
He assumed also that "the law has no relation whatever to the 
goods intended for transportation to another State," but "applies 
purely to the internal trade of the State of Maryland." 12 Accepting 

10 4 Wheat. (U. S.) 316, 436 (1819). 

11 Note 6, supra. 

u 12 Wheat. (U. S.) 419, 451 (1827). The correctness of this assumption may be 
doubted. Taney, who argued the case on behalf of the state, later expressed his ap- 
proval of the decision against his client on the express ground that the tax fell on ulti- 
mate consumers in other states. In his opinion in the License Cases, 5 How. (U. S.) 
504, 575-76 (1847), he says: "The immense amount of foreign products used and con- 
sumed in this country are imported, landed, and offered for sale in a few commercial 
cities, and a very small portion of them are intended or expected to be used in the State 
in which they are imported. A great (perhaps the greater) part imported, in some of 
the cities, is not owned or brought in by citizens of the State, but by citizens of other 
States, or foreigners. And while they are in the hands of the importer for sale, in the 
form and shape in which they were introduced, and in which they are intended to be 
sold, they may be regarded as merely in transitu, and on their way to the distant cities, 
villages and country for which they are destined, and where they are expected to be 
used and consumed, and for the supply of which they were in truth imported. And a 
tax upon them while in this condition, for State purposes, whether by direct assessment, 
or indirectly, by requiring a license to sell, would hardly be more justifiable in principle 
than a transit duty upon the merchandise when passing through a State." 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 907 

his assumptions, his economics is satisfactory. He has some excuse 
for neglecting the fact that sales of foreign goods were discriminated 
against, since Marshall in the majority opinion did not mention the 
point and declared broadly that so long as the goods remain imports, 
their sale in the normal way is immune from state taxation. But 
Marshall would never have allowed a discriminatory tax on sales 
of imported goods even by retailers after the articles had ceased 
to be technical imports within his original-package rule. He ex- 
pressly says that "we do not mean to give any opinion on a tax 
discriminating between foreign and domestic articles," 13 although 
the language of the Maryland Act, warranted placing the decision 
on the ground of such discrimination. 

If we take the case on the assumptions on which the majority 
and minority proceeded, we have the ruling that a general tax on all 
wholesalers of goods for use within the state cannot be imposed on 
those wholesalers who deal exclusively in goods of foreign origin 
which have not previously been sold or taken from their original 
package. Such a tax is not within the letter of the constitutional 
prohibition. It adds to the price of foreign goods no more than it 
adds to the price of home-made articles. Its encroachment on 
federal authority is indirect, remote, and negligible. To -exempt 
sales of imports from burdens which sales -of domestic goods must 
bear confers a positive benefit upon dealers in foreign goods, and 
thereby bestows a bounty on importation. Yet Marshall seemed to 
think that to deny the bounty would be to impose a burden. Now 
that the federal tax on net income is held not to be a tax on exports 
although the income taxed is from an exporting business, 14 a state 
tax on net income must be permitted to reach income from the sale 
of imports and escape conviction on the charge of being a tax on 
imports. Mr. Brown, therefore, if he were doing business in Mary- 
land to-day, would find that he had to include all income from his 
wholesale business in making his returns for the assessment of a 
general state income tax, notwithstanding the fact that he was a 
dealer in imports. Thus Brown v. Maryland 15 has now technical, 
rather than substantial, importance. It does not stand in the way 

13 12 Wheat. (U. S.) 419, 449 (1827). 

14 Peck & Co. v. Lowe, 247 U. S. 165, 38 Sup. Ct. Rep. 432 (1918), 32 Harv. L. 
Rev. 639. 

15 Note 6, supra. 



9 o8 HARVARD LAW REVIEW 

of state taxation of the economic enterprise which in 1827 was re- 
lieved of a $50 license fee. It still forbids specific impositions on 
the business of selling imports, but this goes, not so much to the 
existence of state power, as to the manner of wielding it. The 
famous decision would have been more impregnable against the 
assaults of time if it had been confined to discriminatory taxation. 
Though the Supreme Court has never relaxed its doctrine that no 
license fee can be imposed on foreign or interstate commerce, all 
the license fees with which it has had to deal have been imposed 
on selected enterprises and have therefore had in them the seeds of 
discrimination. 

Two years after Brown v. Maryland 16 came Weston v. City Council 
of Charleston. 17 Here, too, there was discrimination, for the tax in 
question was one imposed, not on all property, but on certain 
selected species, among which "six and seven per cent stock of the 
United States" was included. In holding the levy on United States 
stock an invalid interference with the borrowing power of the na- 
tional government, Marshall made no mention of the fact that such 
stock was taxed while certain other property went free. Mr. Justice 
Johnson in his dissent assumed also that there was no discrimination 
against United States bonds, as is evident from the concluding 
paragraphs of his opinion : 

"Why should not the stock of the United States, when it becomes mixed 
up with the capital of its citizens become subject to taxation in common 
with other capital? Or why should one who enjoys all the advantages 
of a society purchased at a heavy expense, and lives in affluence upon 
an income derived exclusively from interest on government stock, be 
exempted from taxation? 

" No one imagines that it is to be singled out and marked as an object 
of persecution, and that a law professing to tax, will be permitted to 
destroy; this subject was sufficiently explained in McCulloch's case. 
But why should the states be held to confer a bonus or bounty on the 
loans made by the general government? The question is not whether 
their stock is to be exposed to peculiar burdens; but whether it shall 
enjoy privileges and exemptions, directly interfering with the power 
of the states to tax or to borrow. 

" I can see no reason for the exemption, and certainly cannot acquiesce 
in it." 18 ' 

18 Note 6, supra. v 2 Pet. (U. S.) 449 (1829), 31 Haev. L. Rev. 327-29. 

" 2 Pet. (U. S.) 449, 473 (1829). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 909 

Mr. Justice Thompson also dissented. He understands that the 
majority means to hold that stock of the United States "is not to 
be included in the estimate of property subject to taxation" on "the 
broad ground" that it is "not taxable in any shape or manner 
whatever." 19 His objection to the decision is that the interference 
with the United States from permitting the tax is slight as com- 
pared with the evil of exempting the property and creating a priv- 
ileged class of public creditors : 

"No one procures stock without exchanging for it an equivalent in money 
or some other property; all which was, doubtless, subject to the payment 
of taxes. Exemption from taxation may hold out an inducement to 
invest property in stock of the United States, and might, possibly, enable 
the government to procure loans with more facility, and perhaps on 
better terms. But this possible, or even certain benefit to the United 
States, cannot extinguish pre-existing state rights. To consider this a 
tax upon the means employed by the general government for carrying on 
its operations, is, certainly, very great refinement. It is not a tax that 
operates directly upon any power or credit of the United States. The 
utmost extent to which the most watchful jealousy can lead is, that 
it may, by possibility, prevent the government from borrowing money on 
quite so good terms. And even this inconvenience is extremely question- 
able; for the stock only pays the same tax that the money with which it 
was purchased did. And whether the property exists in one form or the 
other, would seem to be matter of very little importance to the owner. 
But great injustice is done to others, by exempting men who are living 
upon the interest of their money, invested in stock of the United States, 
from the payment of taxes; thereby establishing a privileged class of 
public creditors who, though living under the protection of the govern- 
ment, are exempted from bearing any of its burdens. A construction 
of the Constitution, drawing after it such consequences, ought to be 
very palpable before it is adopted." 20 

In 1842, Dobbins v. Commissioners of Erie County 21 held without 
dissent that a revenue officer of the United States could not be 
subjected to a state tax imposed on "all offices and posts of profit." 
The law made it the duty of the assessors "to rate all offices and 
posts of profit, professions, trades, and occupations, at their dis- 
cretion, having a due regard to the profits arising therefrom." 22 

» 2 Pet. (U. S.) 476. 2 ° Ibid., 478. 

a 16 Pet. (U. S.) 435 (1842). » Ibid., 445. 



9 io HARVARD LAW REVIEW 

The tax appears to have been one of the so-called faculty taxes, 
rather than an income tax. The plaintiff's office was assessed at 
$500, and the assessments on it for three years had amounted al- 
together to $10.75. The tax could hardly be called discriminatory, 
for it reached not only all professions, trades and occupations, but 
all idle bachelors over the age of twenty-one. The absence of dis- 
crimination was called to the attention of the court by counsel for 
the county, but was not referred to in the opinion. The decision 
proceeded on the broad ground that the salaries of all officers of 
the United States are exempt from taxation by the states. It was 
assumed without analysis that state taxation on federal salaries, 
whether discriminatory or not, would affect the compensation 
which the federal government would have to pay its officials. While 
the opinion as a whole is based on political rather than on economic 
considerations, Mr. Justice Wayne introduces the latter when he 
says: 

"Is the officer, as such, less a means to carry into effect these great 
objects than the vessel which he commands, the instruments which are 
used to navigate her, or than the guns put on board to enforce obedience 
to the law? These inanimate objects, it is admitted, cannot be taxed 
by a state, because they are means. Is not the officer more so, who gives 
use and efficacy to the whole? Is not compensation the means by 
which his services are procured and retained? It is true it becomes his 
when he has earned it. If it can be taxed by a state as compensation, 
will not Congress have to graduate its amount, with reference to its 
reduction by the tax? Could Congress use an uncontrolled discretion 
in fixing the amount of compensation, as it would do without the inter- 
ference of such a tax? The execution of a national power by way of 
compensation to officers, can in no way be subordinate to the action of 
the state legislatures upon the same subject. It would destroy also all 
uniformity of compensation for the same service, as the taxes by the 
states would be different. To allow such a right of taxation to be in 
the states, would also in effect be to give the states a revenue out of the 
revenue of the United States, to which they are not constitutionally 
entitled, either directly or indirectly, neither by their own action, nor 
by that of Congress." 23 

Later on the learned justice treats a tax on the salary as equivalent 
to a prohibition of the receipt of the salary and therefore in direct 

» 16 Pet. OJ. S.) 448. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 911 

conflict with the Act of Congress authorizing its payment from the 
federal treasury. 24 

The element of discrimination which had been present in the 
three cases decided in Marshall's time, and which had passed un- 
noticed, received explicit consideration from Mr. Justice Nelson in 
Bank of Commerce v. New York City 25 decided in the second year 
of the Civil War. The learned justice's treatment of the point is 
not wholly immune from criticism. The tax before him was one on 
the capital stock of a bank, and the decision was that a tax on the 
capital was a tax on the property in which the capital was invested, 
and that such part of this capital as was invested in United States 
bonds must be excluded from assessment. In answer to the con- 
tention that the Weston case did not apply to such a tax, he said: 

"It is true that the ordinance imposing the tax in the case of Weston 
vs. The City of Charleston, did discriminate between the stock of the 
United States and other property — that is, the ordinance did not 
purport to impose a tax upon all the property owned by the taxpayers 
of the City, and specially excepted certain property altogether from 
taxation. The only uniformity in the taxation was, that it was levied 
equally upon the articles enumerated, and which were taxed. To this 
extent it might be regarded as a tax on the stock eo nomine. But does 
this distinction thus put forth between the two cases- distinguish them in 
principle? The argument admits that a tax eo nomine, or one that dis- 
tinguishes unfavorably the stock of the United States from the other 
property of the taxpayer, cannot be upheld. Why? Because, as is said, 
if this power to discriminate be admitted to belong to the State it might 
be exercised to the destruction of the value of the stock, and, conse- 
quently, of the power or function of the Federal Government to issue it 
for any practical uses. ... It will be seen, therefore, that the distinction 
claimed rests upon a limitation of the exercise of the taxing power of the 
State; that if the tax is imposed indiscriminately upon all the property 
of the individual or corporation, the stock may be included in the valua- 

24 "The compensation of an officer of the United States is fixed by a law made by 
Congress. It is in its conclusive discretion to determine what shall be given. It exer- 
cises the discretion and fixes the amount, and confers upon the officer the right to re- 
ceive it when it has been earned. Does not a tax then by a state upon the office, dimi- 
nishing the recompense, conflict with the law of the United States, which secures it to 
the officer in its entireness? It certainly has such an effect; and any law of a state im- 
posing such a tax cannot be constitutional, because it conflicts with a law of Congress 
made in pursuance of the Constitution, and which makes it the supreme law of the 
land." (16 Pet. (U. S.) 435, 449-50.) „ 

25 2 Black (U. S.) 620 (1862), 31 Harv. L. Rev. 329. 



Qi2 HARVARD LAW REVIEW 

tion; if not, it must be excluded or cannot be reached. The argument 
concedes that the Federal stock is not subject to the general taxing 
power of the State, a power resting in the discretion of its constituted 
authorities as to the objects of taxation, and the amount imposed." 26 

But the argument need not make any such concession. Whether 
United States bonds are subject to the taxing power of the state 
may depend upon the effect of such taxation on the borrowing power 
of the nation. The effect will vary with the methods adopted. 
If United States bonds are taxed and securities which compete for 
buyers are exempted, the former are placed at a disadvantage. The 
same result does not necessarily follow when all corporations are 
taxed on their capital irrespective of the securities in which it is 
invested. Certainly the effect of such a tax'differs from, the effect of 
a discriminatory tax, and the concession that a state may not impose 
a tax "that distinguishes unfavorably the stock of the United 
States from the other property of the taxpayer" does not in common 
sense carry an admission that a state cannot impose a tax which 
avoids any such unfavorable distinction. 

Mr. Justice Nelson is to be criticized also for his later assertion 
that it cannot be a question for judicial determination whether 
there is discrimination. He thinks that if the state can tax in any 
way, it must necessarily be free to tax in every way. Restraints 
against discrimination can be imposed only by the state itself. 
This conclusion is interwoven with the assumption that any com- 
plaint against discrimination goes only to the wisdom or unwisdom 
of an exercise of power and not to the existence or lawfulness thereof. 
The absence of any inexorable necessity for such a position is 
demonstrated by the cases dealing with state taxes on peddlers 
or property and holding them invalid when goods or the sales of 
goods of extra-state origin are selected for discriminatory burdens. 27 
Congress has made the absence of discrimination the test of state 
authority to tax the shares of stock in national banks, and the 
Supreme Court has had abundant practice in applying the test. 28 

That the test of discrimination is often a difficult one to apply 
may be conceded. Mr. Justice Nelson is on firmer ground when he 

26 2 Black (U. S.) 620, 629-30 (1862)." 

27 Welton v. Missouri, 91 U. S. 275 (1875); Darnell v. Memphis, 208 U. S. 113, 28 
Sup. Ct. Rep. 247 (1908), 31 Haev. L. Rev. 573-74. 

28 See 31 Harv. L. Rev. 344-69. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 913 

lays emphasis on this point in the succeeding paragraph of his 
opinion: 

"There is and must always be a considerable latitude of discretion 
in every wise Government in the exercise of the taxing power, both as 
to the objects and the amount, and of discrimination in respect to both. 
Property invested in religious institutions, seminaries of learning, chari- 
table institutions, and the like, are examples. Can any Court say that 
these are discriminations which, upon the argument that seeks to distin- 
guish the present from the case of Weston vs. The City of Charleston, 
would or would not take it out of that case?" 29 

Such difficulties have had to be solved in dealing with taxes on 
shares of stock in national banks, but a court may well hesitate to 
invite them when not required so to do. If United States bonds 
were taxable as property, investors would undoubtedly find ways 
to use their funds for purchase of other securities on which the tax 
burden was actually or apparently lighter. An apparent exemption 
which was not an actual one would nevertheless affect the market 
for other securities unfavorably. But these considerations, which 
might justify a court in refusing to allow United States bonds to be 
subject to a property tax, are not pertinent to the issue whether 
they may be included in the assessment of a tax on the capital of a 
corporation. If the corporation must pay the same tax whatever 
the rank or title of its investments, it is denied access to places of 
untaxed refuge which may be open to an individual. It can reduce 
its tax only by the Samson-like method of diminishing its assets. 
Mr. Justice Nelson's remarks on the difficulty of applying the test 
of discrimination may justify a refusal to limit Weston v. City 
Council of Charleston 30 to a tax that is patently discriminatory, 
since the tax there involved was directly on property; but the diffi- 
culties which the learned justice suggested were absent from the 
case before him. 

If we put to one side the question of discrimination, we can 
readily agree that a tax on the capital of a corporation is a tax on the 
property in which that capital is invested. To tax United States 
bonds through a tax on corporate capital may have a different 
effect on the federal borrowing power than to tax them directly, 
but none the less it is the bonds that are taxed. In Bank Tax Case? 1 

29 2 Black (U. S.) 620, 631 (1862). * 30 Note 17, supra. 

31 2 Wall. (U. S.) 200 (1864), 31 Harv. L. Rev. 330. 



914 HARVARD LAW REVIEW 

which followed Bank of Commerce v. New York City, 32 Mr. Justice 
Nelson remarked wisely: 

"It is not easy to separate the property in which the capital is invested 
from the capital itself. It requires some refinement to separate the two 
thus intimately blended together. The capital is not an ideal, fictitious, 
arbitrary sum of money set down in the articles of association, but, in 
the theory and practical operation of the system, is composed of sub- 
stantial property, and which gives value and solidity to the stock of the 
institution." 33 

If it is conceived that any and all taxes on federal securities are 
unconstitutional obstructions to the federal borrowing power, the 
state should not be allowed to escape from the restriction by calling 
the securities some book-keeping name. It is clear that in Bank 
Tax Case 34 and Bank of Commerce v. New York City, Zb the Supreme 
Court meant to protect federal securities from state taxation in any 
form. A court could hardly be expected to do otherwise while the 
Civil War was raging and the government at Washington needed 
all the support to its credit that was available. It was no time for 
nice discriminations between burdens and denial of bounties. 

A few years later, however, when the conflict between the states 
had ended, a majority of the Supreme Court allowed a state to 
impose a tax on the privilege of being a corporation and measure 
the amount by assets which included United States bonds. 36 Then 
followed decisions allowing inheritance taxes on bequests of federal 
securities 37 and permitting the economic value contributed by 
United States bonds owned by a corporation to be included in the 
assessment of the shares of stock owned by individuals. 38 So far as 
appears, federal securities may be a source of state revenue both 
through a tax on the franchise of a corporation and a tax on the 
shares owned by individuals. The difference between a tax on 

32 Note 25, supra. M 2 Wall. (U. S.) 200, 208-09 C 1 ^). 

34 Note 31, supra. 

35 Note 25, supra. 

36 Society for Savings v. Coite, 6 Wall. (U. S.) 594 (1868); Provident Savings Insti- 
tution v. Massachusetts, 6 Wall. (U. S.) 611 (1868); Hamilton Co. v. Massachusetts, 
6 Wall. (U. S.) 632 (1868); Home Insurance Co. v. New York, 134 U. S. 594, 10 Sup. Ct. 
Rep. 593 (1890); 31 Harv. L. Rev. 331-35. 

37 Plummer v. Coler, 178 U. S. 115, 20 Sup. Ct. Rep. 829 (1900), 31 Harv. L. Rev. 
336. 

38 Van Allen v. Assessors, 3 Wall. (U. S.) 573 (1866); Cleveland Trust Co. v. Lander, 
184 U. S. in, 22 Sup. Ct. Rep. 394 (1902); 31 Harv. L. Rev. 339-41. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 915 

the capital of a corporation and a tax on its franchise measured by- 
its capital is one between tweedledum and tweedledee. Since taxes 
on a corporation are in last analysis taxes on the interest of the 
shareholders in the corporate assets or business, to exclude federal 
securities from the computation of a tax on the corporate capital 
and to include them in the assessment of the shares of stock is to 
allow the state to reach with one hand what it is forbidden to touch 
with the other. The idea that federal securities cannot be taxed by 
a state is a mythical fancy so long as such securities belonging to a 
corporation may enter into the assessment of a tax on the corporate 
franchise and of a further tax on the interest of the shareholders 
in the corporation. 

The burden put upon the federal borrowing power by such taxa- 
tion of federal securities in the vaults of corporations is of course a 
more limited one than would be imposed by their inclusion in all 
property taxation. But the court in subjecting United States bonds 
owned by corporations to the fiscal power of a state did not go on 
any such common-sense distinction. The inclusion of the bonds in 
the assessment of franchise taxes was sustained on the theory of the 
absolute power of a state over privileges which it might grant or 
withhold. 39 The taxation of shares at their full value without de- 
duction of the contribution of United States bonds to that value 
was approved on the basis of a notion of the "separate individuality" 
of a corporation and its stockholders. 40 The first of these theories 
has since been deprived of capacity to enable a state to measure 
taxes on the local business of foreign corporations engaged also in 
interstate commerce by the value of their total capital stock. 41 
The second has been refused recognition in a recent case ^ in which 
a state sought to impose double taxation on the economic interest 
in shares of a national bank owned by another national bank. It 
had previously been commented on unfavorably by Mr. Justice 
Moody in Home Savings Bank v. Des Moines, 43 which found that a 

39 See passage quoted from Home Insurance case in 31 Harv. L. Rev. 334. "No 
constitutional objection lies in the way of a legislative body prescribing any mode of 
measurement to determine the amount it will charge for the privileges it bestows." 

40 See passage quoted from the Lander case in 31 Harv. L. Rev. 341. 

41 Western Union Telegraph Co. v. Kansas, 216 U. S. 1, 30 Sup. Ct. Rep. 190 (1910), 
and cases following it. See 31 Harv. L. Rev. 584-618, 937-53. 

42 Bank of California v. Richardson, 243 U. S. 476, 39 Sup. Ct. Rep. 165 (1919). 

43 205 U. S. 503, 27 Sup. Ct. Rep. 571 (1907), 31 Harv. L. Rev. 341-44. 



9 i 6 HARVARD LAW REVIEW 

state tax was imposed on the property of a corporation and not on 
that of its shareholders, as the state court had held. It is therefore 
apparent that the decisions allowing United States bonds to be 
taxed through levies on corporate franchises and shares of stock 
are open to reexamination. 

The decision which thwarted a state's endeavor to get two taxes 
out of some national bank stock is Bank of California v. Richardson,** 
decided January 27, 1919. The plaintiff national bank owned 
shares in another national bank known as D. O. Mills and Com- 
pany. It was held taxable on those shares on the authority of 
Bank of Redemption v. Boston 45 which held that congressional per- 
mission to tax the shares of national banks to their owners extended 
to shares owned by other national banks. The state sought also to 
tax the shareholders of the plaintiff bank on the full value of their 
stock without any deduction for that part of the value due to the 
stock of the Mills National Bank owned by the plaintiff bank. The 
minority of the court declared that this was within the letter of 
the congressional permission, and brought to bear the traditional 
theory that the property interest of the stockholder is essentially dif- 
ferent from that of the corporation, and that therefore a tax on the 
stockholder's interest in the plaintiff bank was not a tax on the 
property of the plaintiff. But the majority held that the purpose of 
the congressional permission was to allow but a single tax on national 
bank shares and that this purpose was defeated if the shares in the 
Mills Bank, after being taxed directly to the plaintiff bank which 
owned them, entered into the assessment of another tax on the shares 
of the plaintiff bank owned by individuals. The notion of " separate 
individuality" was not allowed to support a result deemed unde- 
sirable and in substance, though not literally, without the congres- 
sional permission upon which state power over national bank stock 
is held to rest. The Chief Justice's treatment of the issue is not 
so sharp as might be desired, but the basis of the decision may be 
gathered from the following paragraphs: 

"It is undoubted that the statute from the purely legal point of view, 
with the object of protecting the federal corporate agencies which it 
created from state burdens and securing the continued existence of such 
agencies despite the changing incidents of stock ownership, treated the 
banking corporations and their stockholders as different. But it is also 

u Note 42, supra. * 125 U. S. 60, 8 Sup. Ct. Rep. 772 (1888). 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 917 

undoubted that the statute for the purpose of preserving the state power 
of taxation, considering the subject from the point of view of ultimate 
beneficial interest, treated the stock interest, that is, the stockholder, 
and the bank as one and subject to one taxation by the methods which 
it provided. . . . Again, when the purposes of the statute are taken into 
view, the conclusion cannot be escaped that the transmutation of the 
stock interest of the California in the Mills Bank, into an asset of the 
California Bank subject to be taxed for the purpose of reaching its stock- 
holders, is to overthrow the very fundamental ground upon which the 
taxation of stockholders must rest." 46 

On the basis of this decision, it would be possible to support the 
contention that United States bonds owned by a corporation, 
since they must be excluded from the computation of a tax on the 
capital of the corporation, must also be excluded from a tax on the 
shares of stock in the corporation. Evidently a majority of the 
Supreme Court favored this view in 1907/when Home Savings Bank 
v. Des Moines 47 was decided, though the contrary view was recog- 
nized as too firmly established to be overthrown. It is to be assumed, 
therefore, that the Supreme Court will continue to permit the states 
to tax United States bonds owned by corporations through full 
assessment of their shares of stock. It would be wholesome, how- 
ever, if some better basis for such taxation could be found than the 
unsubstantial one that the property of the shareholders is distinct 
from that of the corporation. 

Such a basis appears in the rules which have been worked out in 
the field of state taxation of interstate commerce. If we discard all 
the doctrinal disquisitions of the opinions and look only to the 
results of the decisions, we find that the controlling motive of the 
Supreme Court has been the desire to prevent the states from im- 
posing on interstate commerce any peculiar or unusual burden. 
Where the court has been assured that the state did not have a 
device which might be operated to discriminate against interstate 
commerce, taxation of that commerce has been allowed. Net in- 
come from interstate commerce may be included in a general income 
tax. 48 Property used in interstate commerce may be assessed by 

46 248 U. S. 476, 485, 39 Sup. Ct. Rep. 165 (1919). 

47 Note 43, supra. See 31 Harv. L. Rev. 343. 

48 United States Glue Co. v. Oak Creek, 247 U. S. 321, 38 Sup. Ct. Rep. 499 (1918), 
32 Harv. L. Rev. 634-43. 



9 i8 HARVARD LAW REVIEW 

capitalizing the earnings from the business which it serves. 49 Even 
gross receipts from interstate commerce may be taxed in the guise 
of a property tax where the result is no more than a fair equivalent 
for ordinary property taxation. 50 The decisions sanctioning these 
results make it clear that a state which confines its taxation to 
levies on tangible property and on net income will have to take little 
or no account of the commerce clause. When it imposes license 
or franchise or occupation taxes, or adopts any other revenue de- 
vices which are not certain to fall equally on all enterprise within the 
state, then it runs the risk of disappointment whenever it seeks to 
lay its hand on interstate commerce. What the court is insistent 
upon is that there must be adequate safeguards against subjecting 
interstate commerce to heavier taxation than local commerce. It 
does not require the states to confer a bounty upon interstate com- 
merce by exempting it from burdens which competing business 
must bear. 

The substantial reason back of these decisions is that interstate 
commerce is not prejudiced by a summons to bear its proportionate 
contribution to the treasuries of the states. So, too, the borrowing 
power of the United States is not interfered with by proportionate 
taxation of the obligations created by its exercise. Taxation of the 
full value of the shares of corporate stock, without inquiry into the 
character of the corporate property which gives that stock some or 
all of its value, can seldom, if ever, discriminate against part of 
that property in favor of another part. A corporation will be likely 
to buy the same amount of United States bonds whether the shares 
of its stockholders are taxed at their full value or are entirely exempt. 
Taxation of the shares is not, in form, taxation of the property of 
the corporation. Technically, therefore, such taxation does not fall 
on a federal instrumentality, even when the corporation owns 
United States bonds. If, then, a tax on the shares does not actually 
place the United States at a disadvantage in marketing its bonds, 
there is no basis either formal or substantial on which to require the 
exclusion of the value contributed by such bonds from the assess- 
ment of the shares. 

A more difficult problem confronts us when we seek to distin- 
guish between a tax on corporate capital and a tax on a corporate 
franchise measured by the amount of the capital. The distinction 

49 32 Harv. L. Rev. 239-65. 60 32 Harv. L. Rev. 377-416. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 919 

is no longer accorded recognition to enable a state to impose on for- 
eign corporations engaged partly in interstate commerce a tax which 
is in substance on extra-state property. 51 Should it continue to allow 
a state to tax United States bonds owned by a corporation through 
the device of a tax on the < franchise '-oi a corporation measured 
by the value of its capital? The answer must depend upon whether 
there is any substantial reason for holding that a tax directly on the 
capital must exclude such part thereof as is invested in United 
States bonds. To require such exclusion is to grant a bounty to 
the federal borrowing power. The extent of the bounty would be 
appreciated if the obligations of competing debtors were similarly 
excluded. The denial of this bounty, therefore, cannot in substance 
be regarded as an interference with the -federal borrowing power. 
We may accept the conclusions that a tax on corporate capital is a 
tax on the property in which it is invested, and that a tax on United 
States bonds is a tax on a federal instrumentality. If, however, 
some particular tax on that instrumentality does not in fact burden 
or interfere with its exercise, there is no economic ground on which 
to declare it unconstitutional. If all other possible grounds are re- 
moved by changing the tax from one formally on capital to one 
formally on a franchise, there is no remaining obstacle to the asser- 
tion of state power. 

Two objections may be made to the foregoing discussion. The 
first is that the United States bonds are taxed twice if they are 
reached through an assessment of the corporate franchise and a 
further assessment of the shares of stock. This is true. But they 
can be taxed twice only as the obligations of competing debtors are 
similarly taxed. This form of double taxation cannot discriminate 
against one borrower in favor of another. If the corporation and 
its stockholders will be subject to separate taxation of their re- 
spective legal interests without regard to the character of the in- 
vestments of the corporation, this double taxation cannot exercise 
any direct influence on the corporation in its choice of investments. 
On the other hand, if United States bonds are excluded from the 
assessment of either tax, while the obligations of competing debtors 
are included in the assessment of both, the federal government has 
been granted a preference. This answer, it must be recognized, 
flies in the face of Bank of California v. Richardson? 2 If that de- 

61 Note 41, supra. « Note 42, supra. 



9 20 HARVARD LAW REVIEW 

cision has any sound economic justification, the Supreme Court 
ought to apply it to the objection against double taxation now 
under consideration. The reply is that Bank of California v. Rich- 
ardson 53 is not supportable on economic grounds. It must stand 
or fall on the assumption on which it proceeds, i. e., that Congress 
has expressly dealt with the problem and permitted but a single 
tax on the economic interest represented by shares in national 
banks. 54 

The further objection to the inclusion of United States bonds in 
assessments of corporate franchises and shares of stock is that such 
inclusion may in fact operate to deter corporations from investing 
in those bonds. The argument runs as follows. With the normal 
difference between the interest rate of public and of private obliga- 
tions due to the superior security of the former, a tax on capital 
value would bear more heavily on the bonds with the lower interest 
rate. Those who might prefer three-per-cent government bonds 
to six-per-cent railroad bonds, when both were exempt from taxa- 
tion, would be likely to alter their preference if a two-per-cent tax 
reduced the income to one and four per cent respectively. The dis- 
crepancy would be reduced by the resulting alterations of capital 
value, but the effect on the borrowing power of the United States 
would not thereby be lessened. Giving full account to the fact that 
the capacity of the United States to borrow at lower interest rates 
than individuals or corporations is due in considerable part to a 
bounty conferred by the exemption of federal securities from burdens 
that competitors must bear, it may still be true that the removal of 
the exemption would in many instances be something more than 
the denial of a bounty. It may operate practically to deny to the 
government a part of the advantage conferred by the excellence 
of its credit. There may be a minimum to the total net income with 
which an investor will be content without looking for all possible 
ways of increase. He may look less favorably on three- or. four-per- 
cent bonds subject to a two-per-cent tax, even though six-per-cent 

ra Note 42, supra. 

64 The Chief Justice hints that he could support the case on economic grounds if he 
had to, but he refrains from elaborating the hint. On page 485 he says: "We do not 
stop to point out the double burden resulting from the taxation of the same value twice 
which the assessment manifested, as to do so could add no cogency to the violation 
of the one power to tax by the one prescribed method conferred by the statute and 
which was the sole measure of the state authority." 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 921 

bonds also yield only four per cent net, than on the same three or 
four per cents when they and the six per cents produce a net yield 
of those amounts. It is more congenial [to give the state a third 
of one's income from any given source than to divide fifty-fifty. 
Though a corporation may make a sacrifice of income to gain the 
benefit of sure and quick assets, its sacrificial spirit is likely to vary 
inversely with the amount involved in its indulgence. Whether a 
corporation would be wise to reduce its proportion of high-grade 
assets because of a diminution in their net yield is not in point. If 
it would in fact do so, a nondiscriminatory tax on the capital value 
of all its assets in whatever form imposed, would reduce the market 
for United States bonds. 

Here is an incalculable factor. It may be of considerable or of 
little importance. An argument against allowing it consideration 
may be found in the fact that there is no reason why an investor 
should ever take less interest than he can get, except as he receives 
other advantages which he regards as compensatory. A corpora- 
tion which foregoes income to gain security ought to stick to its 
choice even when pinched by increased taxation or by any other 
expense. It would have the same inducement to increase its in- 
terest receipts, whatever the cause of its decreased net income — 
whether it has to spend an additional $5,000 for taxes or for in- 
creased wages. It could hardly be said that a labor union was 
interfering with a federal instrumentality because it succeeded in 
establishing such higher wage schedules that the employing cor- 
poration decided to invest henceforth only in seven-per-cent stocks 
in order to maintain its rate of dividends. The analogy affords a 
basis for the argument that such effect as taxation of corporate stock 
or franchise may have to deter the corporation from purchasing 
high-grade low-interest-bearing securities must be regarded as in- 
direct, since the same effect may be contributed by other factors. 

Nevertheless it remains true that taxation measured by the value 
of securities owned, and which therefore in effect falls on those se- 
curities, falls more heavily on securities with the lower interest 
yield. The ratio between the net yield of public and of private 
obligations is more favorable to the latter when both are taxed on 
their capital value than when both are exempt. It may well be, 
therefore, that state taxation directly on United States bonds 
should be forbidden on economic grounds. How, then, are we to 



922 HARVARD LAW REVIEW 

justify state taxation indirectly on those bonds? The best answer 
seems to be that their exemption from direct taxation is not only 
protection against a burden but also the grant of a bounty. The 
two cannot be separated. The states, therefore, are required to 
lend positive aid to the federal borrowing power at considerable 
sacrifice to themselves. This aid is given to the entire market 
afforded by individual investors. Such aid may well be credited 
to the states against any charge that full taxation of corporate 
shares and franchises deprives the federal government to some 
extent of the advantages due to its superior credit by making cor- 
porations less ready to sacrifice security for income. 

It is obvious that the deleterious effect on the federal borrowing 
power which may possibly ensue from state'taxation on the capital 
value of all stocks and bonds will not follow from state levies on all 
net income. A two-per-cent tax on the capital value of two $1,000 
bonds both selling at par, one issued by the government and paying 
$30 annually, and the other issued by a private corporation and 
paying $60 annually, will reduce their net yield to $10 and $40 re- 
spectively. The tax takes two-thirds of the income from the govern- 
ment bond and only one-third of the income from the corporation 
bond. On the other hand a thirty-per-cent tax on the income from 
the bonds would reduce their net yield to $21 and $42 respectively, 
leaving the ratio between them the same as when both are exempt. 
It might therefore be urged that the states should be allowed to 
include income from federal securities in a general income tax. 
Such a tax can be called one "upon the person for the general ad- 
vantages of living in the jurisdiction," 55 or "but a method of dis- 
tributing the cost of government," 56 or some of the other names that 
have been found convenient in sustaining taxes. Its effect on the 
federal borrowing power may be declared "indirect and remote," like 
the effect on exportation of a tax on net income from an exporting 
business. 57 It would not, it is conceived, place the federal borrowing 
power under any disadvantages that it would not labor under 
if all intangibles were entirely exempted from any form of taxation. 

58 Mr. Justice Holmes, in Fidelity & Columbia Trust Co. v. Louisville, 245 U. S. 54, 
58, 38 Sup. Ct. Rep. 40 (191 7), 32 Harv. L. Rev. 655. 

56 Mr. Justice Pitney in United States Glue Co. v. Oak Creek, 247 U. S. 321, 329, 
38 Sup. Ct. Rep. 499 (1918), 32 Harv. L. Rev, 636. 

57 See Mr. Justice Van Devanter in Peck & Co. v. Lowe, 247 U. S. 165, 174-75, 38 
Sup. Ct. Rep. 432 (1918), 32 Harv. L. Rev. 639. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 923 

To exclude interest on United States bonds from a general state in- 
come tax is to confer upon the federal borrowing power a bounty 
to the extent of the exemption. To include such income would regu- 
late the activities of the federal government no more than the per- 
mitted inclusion of income from interstate commerce regulates that 
commerce "in a constitutional sense." It seems, therefore, that the 
reason for the exemption of income from United States bonds from 
state-wide income taxes must be political rather than economic. 
It must be a conception that the federal government is entitled to 
claim from the states a subsidy for its borrowing power. 

It is interesting that no case has specifically held that the states 
cannot include income from federal bonds in a general state income 
tax. It is clear, however, that until recently, at any rate, the Su- 
preme Court has regarded a tax on income as indistinguishable from 
a tax on the source of the income. In Pollock v. Farmers' Loan & 
Trust Co., 58 which held that the federal government cannot tax the in- 
come from state and municipal bonds, Chief Justice Fuller declared : 

"It is contended that although the property or revenues of the States 
or their instrumentalities cannot be taxed, nevertheless the income de- 
rived from state, county, and municipal securities can be taxed. But 
we think the same want of power to tax the property or revenues of the 
States or their instrumentalities exists in relation to a tax on the income 
from their securities, and for the same reason, and that reason is given 
by Chief Justice Marshall in Weston v. Charleston, 2 Pet. 449, 468, where 
he said: 'The right to tax the contract to any extent, when made, must 
operate upon the power to borrow before it is exercised, and have a 
sensible influence on the contract. The extent of this influence depends 
on the will of a distinct government. To any extent, however incon- 
siderable, it is a burthen on the operations of government. It may be 
carried to an extent which shall arrest them entirely. . . . The tax on 
government stock is thought by this court to be a tax on the contract, 
a tax on the power to borrow money on the credit of the United States, 
and consequently to be repugnant to the Constitution.' Applying this 
language to these municipal securities, it is obvious that taxation on 
the interest therefrom would operate on the power to borrow before 
it is exercised, and would have a sensible influence on the contract, and 
that the tax in question is a tax on the power of the States and their 
instrumentalities to borrow money, and consequently repugnant to the 
Constitution." 59 

68 157 U. S. 429, 15 Sup. Ct. Rep. 673 (1895). 59 iiM^ 585-86. 



924 



HARVARD LAW REVIEW 



Earlier in the opinion the Chief Justice reviewed the cases forbidding 
either the states or the nation to tax the salaries of the officers of the 
other, and plainly regarded the want of national power to tax in- 
come from state securities as the complement of an undoubted 
absence of state power to tax income from federal securities. 

Though this immunity of federal securities from state taxation 
has been regarded as inherent in the federal system created by the 
Constitution, Congress has taken the precaution specifically to 
declare that United States bonds shall be exempt from state taxa- 
tion. The Act of February 25, 1862, 60 specifies that "all stocks, 
bonds, and other securities of the United States held by indivi- 
duals, corporations, or associations within the United States, shall 
be exempt from taxation by or under State authority." The Act 
of July 14, 1870, 61 mentions "the interest thereon" as well as the 
bonds. The Act of June 28, 1902, 62 is content with declaring ex- 
emption "from taxation in any form by or under State, municipal, 
or local authority;" but the recent acts under which Liberty Bonds 
have been issued require the states to refrain from taxing both 
"principal and interest." 63 Thus the only constitutional question 
which could now be brought before the court is the existence vel non 
of congressional power to decree the exemption of principal and 
interest of federal securities from state taxation. No one can doubt 
that this power will be sustained, even though the court might now 
be persuaded that the exemption is a bounty rather than the fending 
off of a burden. If Congress deems that the exigencies of the na- 
tional government require that national obligations be wholly free 
from state taxation in any form whatsoever, its judgment will never 
be overruled by the Supreme Court. 

Congress has been content to be silent with respect to state taxa- 
tion of income from corporate dividends when the corporate income 

60 12 Stat, at L. chap. 33, § 2, p. 346, 8 Fed. Stat. Ann. 2 ed., 407. 

61 16 Stat, at L. 272. "... all of which several classes of bonds and the interest 
thereon shall be exempt from the payment of all taxes or duties of the United States, 
as well as from taxation in any form by or under State, municipal, or local authority." 

82 32 Stat, at L. 484. This was the statute authorizing the issue of the so-called 
Panama Canal bonds. 

63 Fed. Stat. Ann. — 1918 Supp. 673: "... both principal and interest shall 
be exempt from all taxes or duties of the United States as well as from taxation in any 
form by or under State, municipal, or local authority." (Act of March 3, 1917O 
Similar language is used in the Act of September 24, 1917, Fed. Stat. Ann. — 1918 
Supp. 684. 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 925 

is from United States bonds, and state taxation of corporate fran- 
chises measured by earnings some of which are from United States 
bonds. Flint v. Stone Tracy Co. 64 permitted income from state 
bonds to be included in the measure of a federal excise on doing busi- 
ness in corporate capacity. Lynch v. Hornby 65 held that cash divi- 
dends paid to stockholders after the effective date of the federal 
income tax law of 1913 were taxable to them as income, although 
the dividends were the fruit of a surplus accumulated by the cor- 
poration before the enactment of the Sixteenth Amendment. Cor- 
porate income which was exempt is taxable when transmuted into 
stockholder's income. Corporate income which cannot be taxed 
may be made the measure of a tax on doing business in corporate 
form. Here are precedents to lean on in sanctioning state taxation 
of stockholder's income without regard to its economic ^origin, 
and state taxation of income from United States bonds when 
the tax is not formally on income, but on a privilege measured by 
income. 

On the other hand, the distinction between the subject and the 
measure of the tax was dishonored by the court when Kansas sought 
to tax extra-state property in the guise of a tax on the privilege 
of a foreign corporation to do local business in connection with 
interstate business, 66 and the distinction between the shareholder's 
interest in the corporation and the property held by the corporation 
was disregarded when California sought to tax the stockholders of a 
national bank on the full value of their shares, without deduction for 
the contribution made to that value by the shares of another 
national bank owned by the corporation. 67 Obviously in dealing 
with the issues now under consideration the Supreme Court is at 
liberty to accept or reject formal distinctions as it chooses. That 
is one of the characteristic merits and demerits of formal distinc- 
tions. It is a demerit in that it makes prophecy and logical con- 
sistency difficult or impossible. It is a merit in that it permits a 
court to reach such results as its best judgment dictates. 

We have already indicated the reasons which may be advanced, 
in support of the position that the Supreme Court should adhere to 

64 220 U. S. 107, 31 Sup. Ct. Rep. 342 (1911). 

65 247 U. S. 339, 38 Sup. Ct. Rep. 543 (1918). 
68 Note 41, supra. » 

67 Note 42, supra. 



926 HARVARD LAW REVIEW 

its formal distinctions and permit income from federal securities 
to be taxed by the states through excises on corporate franchises 
and through taxes on corporate dividends. If considerations of 
substance do not require exclusion of United States bonds from as- 
sessments of corporate franchises and shares of stock, a fortiori 
such assessments should be permitted to include income .from United 
States bonds. Such taxes measured by income do not deprive bor- 
rowers with superior credit of any advantage which that credit gives. 
Double taxation of stockholder and corporation does not influence 
the choice of corporate investments. And any margin of error in 
such calculations is more than offset by the bounty conferred on 
the federal borrowing power by exemption of interest on United 
States bonds from an income tax which feeds on interest from com- 
peting obligations. 

Thus there appears to be no substantial reason for adding new 
limitations to the power of the states to levy taxes which fall in- 
directly on federal instrumentalities. The distinction between 
taxes on corporate capital and taxes on corporate franchises or on 
shares of stock may be artificial, but it serves a useful purpose; and 
this on the whole is the most reliable test of the merit of a distinction. 
Since taxes directly on United States bonds do not have the serious 
effect on the federal borrowing power which judges of the Supreme 
Court have often assumed, there is good sense in not extending to 
indirect taxation the prohibitions against direct taxation. -Animated 
by such good sense, the Supreme Court has allowed the states to tax 
income from interstate commerce and the United States to tax 
income from an exporting business. It has appreciated that a 
general tax on all net income does not cast any unwarranted burden 
on any particular enterprise from which such income issues. If the 
Supreme Court were making the law of the Constitution de novo, it 
might therefore be expected to allow the states to tax interest 
on federal securities and income from federal salaries, granting 
to the United States a similar power over the fruits of state func- 
tions. The economic implications of Peck & Co. v. Lowe 68 and 
United States Glue Co. v. Oak Creek 69 are opposed to the economics 
underlying Pollock v. Farmers' Loan & Trust Co., 70 Dobbins v. Com- 



68 Note 14, supra. 

69 247 U. S. 321, 38 Sup. Ct. Rep. 499 (1918), 32 Harv. L. Rev. 634/. 
10 Note c8. sutora. 



70 Note 58, supra 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 927 

missioners of Erie County, 11 and Collector v. Day, 72 and thus afford 
a convenient excuse for abandoning the decisions of earlier decades. 73 
Unfortunately for any such possibility, Congress insists on deny- 
ing to the states the power to tax income from federal securities. 
It thereby requires the states to lend their aid to the federal bor- 
rowing power. There seems, therefore, a strong political argument 
in favor of continuing to forbid the United States to tax income 
from state securities. Indeed, the argument may be deemed an 
economic one. We may grant that the effect of exempting interest 
on state bonds from a general federal tax on net incomes is to confer 
a bounty on the state borrowing power. But this is not the whole 
of the story. Such bounty cannot be considered apart from the 
bounty which the states are required to bestow on the federal 
borrowing power, to the consequent restriction of their own taxing 
power. The principle on which these limitations are based is that 
the federal system requires that neither the state nor the nation 
exercise their undoubted powers to the detriment of the undoubted 
powers of the other. No application of this principle can be con- 
sidered apart from the other applications. What is sauce for the 
goose should be sauce for the gander. It is a poor rule that does 
not work both ways. The states receive no more than fair economic 
treatment if, in return for the aid and comfort which they render the 

71 Note 2i, supra. 

72 11 Wall. (U. S.) 113 (1871). This case held that a federal income tax cannot be 
applied to the income of a state judicial officer. The court regarded the exemption of 
state salaries from a federal income tax as the necessary correlative of the exemption 
of federal salaries from state taxation, Mr. Justice Nelson observing: "And if the means 
and instrumentalities employed by that government to carry into operation the powers 
granted to it are, necessarily, and, for the sake of self-preservation, exempt from taxation 
by the States, why are not those of the States depending upon their reserved powers, 
for like reasons, equally exempt from Federal taxation? Their unimpaired existence in 
the one case is as essential as in the other. It is admitted that there is no express pro- 
vision in the Constitution that prohibits the general government from taxing the 
means and instrumentalities of the States, nor is there any prohibiting the States from 
taxing the means and instrumentalities of that government. In both cases the exemp- 
tion rests upon necessary implication, and is upheld by the great law of self-preserva- 
tion; as any government, whose means employed in conducting its operations, if 
subject to the control of another and distinct government, can exist only at the mercy 
of that government. Of what avail are these means if another power may tax them at 
discretion? (n Wall. (TJ. S.) 113, 127.) 

73 For suggestions that the later decisions furnish the ground for overruling the 
earlier ones, see note on Peck & Co. v. Lowe, and the Oak Creek case, in 4 Bulletin 
or the National Tax Association, 26. 



928 HARVARD LAW REVIEW 

federal borrowing power, they receive a corresponding advantage 
for their own borrowing power. 

The same considerations apply to taxation of income from official 
salaries. In this field the Supreme Court may, if it wishes, overrule 
Collector v. Day, 74 and permit the inclusion of state salaries in the 
federal income tax, and overrule Dobbins v. Commissioners of Erie 
County, 75 and permit the states to tax the salaries of federal officials. 
A salary exempt from a tax which other salaries must bear is in- 
creased by that much. Now that we have a federal income tax, a 
$5,000 professorship in a state university yields more than a $5,000 
professorship in an endowed institution of learning. In the absence 
of a state income tax, a $6,000 federal judgeship is worth no more 
than a $6,000 law practice. A state income tax makes the ermine 
more attractive than it was before. The law as it now stands makes 
the states and the United States undergo sacrifices, each for the 
benefit of the other. Neither government would suffer appreciably 
if the burnt offering were no longer required. But if it is required 
of either, it should be required of both. So long as Mr. Dobbins is 
exempt, Mr. Day should be also. The considerations which justify 
exempting either of them are political rather than economic. While 
from the political standpoint there is more reason to apprehend 
state encroachment on federal power than federal encroachment 
on state power, this can hardly justify a court in holding that a 
state tax on a federal salary interferes with a federal instrumentality, 
if a federal tax on a state salary is thought to be immune from criti- 
cism. 

The conclusion to be drawn from our review and analysis of the 
decisions is that, in spite of cross currents and shifting winds of 
doctrine, the states will be permitted to continue the indirect en- 
croachments on federal authority that have hitherto been sanctioned. 
They will be allowed to impose taxes that fall on interstate com- 
merce and on the federal borrowing power, if they do it in approved 
ways. The decisions under the commerce clause may nearly all be 
referred to the judicial conviction that the federal system demands 
that the states shall not discriminate against interstate commerce, 
or indulge in forays on property or business beyond their borders, 
but does not demand that interstate commerce be relieved from 
proportionate contributions. The decisions which have permitted 

74 Note 72, supra. 7B Note 21, supra. 



INDIRECT , ENCROACHMENT ON FEDERAL AUTHORITY 929 

state taxation which falls indirectly on the federal borrowing power 
are satisfactorily explained on the economic ground that they have 
not hampered that borrowing power. There is ample economic justi- 
fication for the cases which have restrained the states from laying 
discriminatory taxes on United States bonds. For the other re- 
strictions which the Supreme Court has placed upon the states 
we must be content with political rather than with economic 
reasons. 

In choosing between competing political considerations, much 
depends on personal predilections. Two of Marshall's colleagues did 
not share his views that United States bonds must be exempt from 
state taxation. What Marshall's doctrine achieved was a protective 
tariff in favor of the infant industry of national credit. His fears 
that the nation might be destroyed if the view of the dissent had 
prevailed must be regarded as extravagant. But this does not 
question the fundamental wisdom of his judgment, particularly 
at the time when it was rendered. Congress plainly believes that 
the judgment is as sound to-day, since it demands the continuance 
of the protection which Marshall decreed. It is difficult to quarrel 
with the position that the powers of the nation shall be immune 
from the direct touch of the states. In determining the constitu- 
tionality of state taxation which falls directly on federal instru- 
mentalities, we can readily forego nice analysis as to its economic 
effects. But an understanding of those effects is essential to a 
proper evaluation of the decisions which permit state taxation 
that falls indirectly on those same instrumentalities. Distinctions 
between direct and indirect effect which seem unsubstantial, when 
abstracted from the complete situation in which they play their 
part, are found to be useful implements for reaching desirable 
results. In permitting indirect encroachment on federal authority 
by the taxing powers of the states, the Supreme Court has been 
wise in its judgments. If its conclusions deserve more praise than 
does some of the reasoning by which they have been supported, 
the phenomenon is not peculiar to the particular problem which 
we have been considering. 

The explanation of the unsatisfactory character of so much of the 
judicial reasoning here and elsewhere is easily discovered. Deci- 
sions which are dictated by the necessity of making a wise practical 
choice between competing considerations are seldom placed frankly 



'930 HARVARD LAW REVIEW 

on that ground. Judges are loth to say: "We decide this particular 
case in this particular way because we think that this is the best 
way to decide it." Instead, they are prone to refer their judgment 
to some immutable principle inherent in the nature of things, or 
unalterably established by the authoritative judgments of their 
predecessors. In the realm of constitutional law, courts are fond 
of professing that it is not they that speak, but the Constitution 
that speaketh in them, even in settling such disputes as this study 
has chronicled, concerning which concededly the Constitution is 
silent. Where the Constitution is not wholly mum, it often speaks 
with such a still, small voice that only a bare majority of the court 
can hear its echo. Yet the judicial opinions seldom recognize the 
patent fact. So long as judges pose as automatons when they are 
in fact wise arbiters of public policy and practical expediency, they 
necessarily hide their wisdom under the bushel of a supposed con- 
straining conceptualism, which confuses much that would otherwise 
be simple and clear. The wonder is that wisdom so generally finds 
its way and controls the actual adjudications which together make 
the law. This could hardly be, if doctrine played any such potent 
part in shaping the course of the decisions as the opinions of the 
judges would lead us to believe. 

The judicial umpiring of the contests between the conflicting 
claims of the states and of the nation over the exercise of the taxing 
power has clearly not been controlled by any undisputed and com- 
pelling doctrine. That is why it has so greatly perplexed those who 
see in doctrine their only guide. To dispel the perplexity we must 
study the cases as practical adjustments of competing interests, 
each of which is entitled to a degree of consideration. The interest 
which will be accorded the preference in one situation may have to 
be determined in the light of the preferences which have been ac- 
corded in other situations. No single adjustment liveth to itself 
alone. In a federal system there must be reciprocal give and take 
between the whole and the several parts. It must often be impossi- 
ble in particular instances to make an even apportionment of the 
giving and the taking. So it may be necessary to favor now one 
side, and now the other. The aim should be to strike as even a 
balance as possible in the whole account. This can never be done 
by pious invocation of some image which men choose to call "Sov- 
ereignty." It must be done, as it has been done, by applying human 



INDIRECT ENCROACHMENT ON FEDERAL AUTHORITY 931 

intelligence to the enterprise of forecasting and evaluating the 
practical results from differing courses of action, and of choosing that 
course which leads to the result preferred. Marshall pursued a vain 
hope in thinking it possible to "measure the power of taxation 
residing in the State by the extent of sovereignty which the people 
of a single State possess and can confer on its government." We can, 
however, if we find it necessary, measure to a considerable degree 
the extent of sovereignty residing in the state, by finding what the 
official interpreters of the Constitution permit the state to do in the 
exercise of the power of taxation and of other governmental func- 
tions. "Sovereignty" is a way of stating results rather than a 
means of reaching them. 

Thomas Reed Powell. 

Columbia University. 



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